Dryden Co is a U.S. firm that plans a foreign project in which it needs $8,000,0

Question

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:

A. Equity:

     B. All U.S. debt denominated in dollars provided by U.S banks:

     C. All debt (loans) denominated in euros provided by European banks:

     D. Half of funds obtained from loans denominated in Euros from loans denominated in dollars:

Which form of financing will cause the projects NPV to be the least sensitive to exchange rate risk?

Explanation / Answer

C. All debt (loans) denominated in euros provided by European banks:

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