Consider the investment cash flows in Problem 13.1. The spot rate is . Risk-free bond yields of percent and percent mirror the 2.91 percent inflation differential:

.

However, nominal required returns on the risky project are percent and percent because of a lower risk premium in shekels than in yuan:

.

a. Calculate project value from the project's and from the parent's perspectives as in Problem 13.6. Should the firm accept the project? Should the firm hedge?

b. The Israeli parent corporation wants to finance a portion of the project with debt and faces nominal borrowing costs of percent and percent. In which currency would it make more sense to borrow? If the parent decides to hedge the project's operating cash flows, should the hedge be done with currency forwards or foreign currency debt, all else constant?
Investment and financial side effects in cross-border capital budgeting.