Firenza Motors$($Italy$).$Firenza motors of Italy recently took out a $4-$year euro$4\mathrm{.}5$ million loan on a$$ floating$-$rate basis. It is now$$ worried, however, about rising interest costs. Although it had initially believed interest rates in the eurozone would be trending downward when taking out the$$ loan, recent economic indicators show growing inflationary pressures. Analysts are predicting that the European Central Bank will slow monetary$$ growth, driving interest rates up$.$

Firenza is now considering whether to seek some protection against a rise in$$ euro$-$LIBOR, and a forward rate agreement$($FRA$)$ with an insurance company. According to the$$ agreement, Firenza would pay to the insurance company at the end of each year the difference between its initial interest cost at LIBORplus$2\mathrm{.}50\%(6\mathrm{.}75\%)$ and any fall in interest cost due to a fall in LIBOR.$$ Conversely, the insurance company would pay to Firenza $70\%$ of the difference between$$ Firenza's initial interest cost and any increase in interest costs caused by a rise in LIBOR. LIBOR is currently $4\mathrm{.}250\%.$

Purchase of the$$ floating$-$rate agreement will cost euro $100$ comma $000,$ paid at the time of the initial loan. What are$$ Firenza's annual financing costs now if LIBOR rises and if LIBOR falls in increments of$0\mathrm{.}5\%?$ Firenza uses $12\%$ as its weighted average cost of capital. Do you recommend that Firenza purchase the$$ FRA?