Question
You're the CFO of a French company trying to decide whether to invest in a project in the United States. You have constructed expected cash
You're the CFO of a French company trying to decide whether to invest in a project in the United States. You have constructed expected cash flows for the project. The project has a significant initial investment (paid immediately if you decide to take the project) but it is expected to generate positive free cash flows every year after.
You are now trying to decide how to calculate the discount rate. One option is to add the sovereign spread (the difference between the yield of foreign and domestic government bonds) to the WACC of a domestic project that looks identical to the U.S. project (other than its location). French government bonds currently have a yield that is about 2 percentage points above the U.S. government bond yields, at all maturities (that is, if the U.S. government bond yield is 1%/year, the same-maturity French government bond yield is 3%/year).
All else equal, how does adding the sovereign spread to the domestic WACC change the NPV of this project (relative to simply using the domestic WACC)?
It could either lower or raise the NPV of the project. | ||
It raises the NPV of the project. | ||
It lowers the NPV of the project. | ||
The NPV of the project is unchanged. |
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