Project Financing Dryden Co. is a U.S. firm that plans a foreign project in which it needs $8,000,000 as an initial investment. The project is expected to generate cash flows of 10 million euros in 1 year after the complete repayment of the loan (including the loan interest and principal). The project has zero salvage value and is terminated at the end of 1 year. Dryden considers financing this project with:
¦ all U.S. equity,
¦ all U.S. debt (loans) denominated in dollars provided by U.S. banks,
¦ all debt (loans) denominated in euros provided by European banks, or
¦ half of funds obtained from loans denominated in euros and half obtained from loans denominated in dollars. Which form of financing will cause the project’s NPV to be the least sensitive to exchange rate risk? Discussion in the Boardroom This exercise can be found in Appendix E at the back of this textbook.
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