ABC Corp is considering expanding to Germany and starting a project that costs 6 Million and is expected to generate 1.5Million in year 1, 2 Million in year 2, and 2.5 Million in year 3. The current spot exchange rate is $1.13, the United States risk-free rate is 2.5%, and the risk-free rate in Europe is 2.1%. Because this is a significantly riskier project than the domestic ones, it was estimated that the cost of capital is 15%. According to a recent market study commissioned by XYZ Corp, its believed that the European subsidiary can be sold at the end of the project for 5 Million.

(a) What are the pros and cons of an international project? What additional risks will the company likely face?

(b) What is the NPV of the project?

(c) What happens to the profits from the international project if the dollar strengthens? What if it weakens? How could the company hedge the exchange rate risk?