You work for a firm whose home currency is the Euro (EUR) and that is considering a foreign investment. The investment yields expected after-tax Swiss Franc (SFR) cash flows (in millions) as follows: -SFR305 in Year 0 and SFR130 in Year 1. The forecast free cash flow will then increase by 5% per annum over the next 3 years. At the end of 4 years, the life of the project will end. The expected rates of inflation in each country are constant per year: 4% in the Eurozone, and 9.00% in Switzerland. From the project's perspective the required return is 13.74%, while from the parent's perspective, the required rate of return is 8.52%. The spot exchange rate is EUR0.9615/SFR.

 

What is the correct course of action for the managers of the firm?
 

a.Accept the project.
 

 

 

b.Accept the project. However, the firm should try to find a way to hedge the currency risk now to capture the NPV. Finance in the local currency, use currency forwards and sell the project to a local investor.
 

 

 

c.Reject the project because it is only adding value from the parent's perspective because of forecast favourable movements in the exchange rate.
 

 

 

d.Reject the project. It is not financially viable from both the project's perspective and the parent's perspective.
 

 

 

e.

None of the options in this question are correct.