The Centralia Corporation is a U$.$S$.$ manufacturer of small kitchen electrical appliances. It

has decided to construct a wholly owned manufacturing facility in Zaragoza, Spain, to

manufacture microwave ovens for sale in the European Union. The plant is expected to cost

$5,500,000,$ and to take about one year to complete. The plant is to be financed over its economic

life of eight years. The borrowing capacity created by this capital expenditure is $$2,900,000$; the

remainder of the plant will be equity financed. Centralia is not well known in the Spanish or

international bond market; consequently, it would have to pay $7$ percent per annum to borrow

euros, whereas the normal borrowing rate in the euro zone for well$-$known firms of equivalent risk

is $6$ percent. Alternatively, Centralia can borrow dollars in the U$.$S$.$ at a rate of $8$ percent.

Answer the following Questions:

a$.$ What amount in USD will the plant cost at a rate of euro to dollar $1\mathrm{.}03?$

b$.$ What amount will be financed?

c$.$ How long will the financing be$?$

d$.$ What is the rate in $?$

e$.$ What is the rate in USD?

What would the payments be on a monthly basis:

a$.$ in $?$

b$.$ In USD?

Which Currency will supply the cheapest method of financing?

Assume that the corporation has agreed to a floating rate loan deal priced at LIBOR plus

$2\mathrm{.}50\%$

a$.$ What price is the swap? $($Assume the $10$ yr rate and the $8$ yr rate is the same.$)$

Complete the attached Swap Flow Chart

How does the SWAP change the calculation in #$3?$

What would you recommend to your Board as the CFO?