You own a US-based firm that is considering upgrading a factory owned by their subsidiary in Belgium. The project costs EUR 4M in startup costs today and will produce EUR 3M per year for the next three years. The current spot rate is USD 1.11 per EUR. The one year forward rate is USD 1.14 per EUR, the two year forward rate is USD 1.17 per EUR, and the three year spot rate is USD 1.2 per EUR. The US parent firm is providing the Belgian subsidiary with 3M EUR in startup capital, and in exchange, will receive dividends of EUR 2M per year for the life of the project. The USD cost of capital for this project is 11% and the EUR cost of capital is 14%.

1. What is the parent valuation of upgrading the factory?

2. What is the project valuation of upgrading the factory?

3. Given that your firm has a significant presence in both the US and Belgium, and that the USD seems to be gaining value against the EUR, what is one way you could structure your operations to take advantage of this situation?