Nashville Co. presently incurs costs of about 12 million Australian dollars (A$) per year for

research and development expenses in Australia. It sells the products that are designed each

year, and all of the products sold each year are invoiced in U.S. dollars. Nashville anticipates

revenue of about $20 million per year, and about half of the revenue will be from sales to

customers in Australia. The Australian dollar is presently valued at $1 (1 U.S. dollar), but it

fluctuates a lot over time. Nashville Co. is planning a new project that will expand its sales to

other regions within the United States, and the sales will be invoiced in dollars. Nashville can

finance this project with a 5-year loan by (1) borrowing only Australian dollars, or (2)

borrowing only U.S. dollars, or (3) borrowing one-half of the funds from each of these sources.

The 5-year interest rates on an Australian dollar loan and a U.S. dollar loan are the same.

If Nashville wants to use the form of financing that will reduce its exposure to exchange

rate risk the most, what is the optimal form of financing?

Now assume that Nashville expects that the Australian dollar will appreciate over time.

Suppose the company wants to maximize its expected net present value of its new project

and is not concerned about its exposure to exchange rate risk. Under these conditions,

which financing alternative is most appropriate?