Assume that a U.S. company wants to invest in a project in Europe that costs 10,000,000. The

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Question:

Assume that a U.S. company wants to invest in a project in Europe that costs €10,000,000. The current spot exchange rate is USD/EUR 1.2000. The project is expected to generate revenues of €2,500,000 per year for the next four years. The company's cost of capital is 8% per year in the U.S. and 6% per year in Europe. Assume a 365-day year for interest rate calculations. Answer the following questions:

(a) Calculate the present value of the project's revenues in USD using the current spot exchange rate.

(b) Assume the company decides to finance the project by issuing euro-denominated bonds in Europe. Calculate the present value of the project's revenues in USD using the euro-denominated bonds as the financing source. Assume that the euro-denominated bonds have a face value of €10,000,000 and a 4-year maturity with semi-annual coupon payments at a fixed rate of 5% per year.

(c) Compare the cost of financing the project using euro-denominated bonds with the cost of financing the project using U.S. dollar-denominated bonds. Which option would you recommend to the U.S. company? Explain your answer.