a. WWX Equipment has an investment opportunity in Europe. The project costs 12 million and is expected to produce cash flows of 2.7 million in year 1, 3.1 million in year 2, and 2.8 million in year 3. The current spot exchange rate is $1.3/. The current risk-free rate in the United States is 5 percent, compared to that in Europe of 3.5 percent. The appropriate discount rate for the project is estimated to be 18 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated 6.5 million. What is the NPV of the project? Should WWX conduct this investment? (16 marks)

b. Describe the foreign currency and home currency approaches to capital budgeting for a foreign project. Which is better? (4 marks)