Your firm is based in France and is considering an investment opportunity in the United States. The project will last for 2 years and require an investment of USD 10,000,000 at time zero. This initial investment has to be depreciated by 50% the first year and the remaining 50% in the second year. Revenues are forecasted to be USD 8,000,000 and USD 12,000,000 in year 1 and year 2, respectively. Costs will amount to USD 1,500,000 in both years. Terminal value is expected to be zero. Additional information: tax rate is 30% in US and 40% in France. Current spot exchange rate is . Inflation rate in France is 4% and ( ) = /1.3 in the US is 6%

a) Compute the APV of the project in EUR choosing one of the two equivalent approaches to do so. The firm does not consider the use of debt to finance the project yet. (Hint: this APV is the sum of all equity financed APV and tax savings from depreciation.) The unlevered (all-equity) return on equity in EUR, Ku, is 9% and the cost of debt in EUR, i, is 5%. Should the French company accept or reject the project? US authorities decided to provide a two-year loan to incentivize the investment. The loan requires the payment of two equal installments, in addition to interest, at the end of each year.

The conditions offered are the following:

- The amount of the loan is US dollars 8,000,000 at a rate of 2% per year. -

The loan schedule for the principal is to be repaid in two equal installments.