McCain Foods, a Canadian food processing and distribution company, is considering an investment in Germany. You are in McCain’s corporate finance department and are responsible for deciding whether to undertake the project. The expected free cash flows, in EUR, are uncorrelated to the spot exchange rate and are shown here:
The new project has similar dollar risk to McCain’s other projects. Management at the company knows that its overall CAD WACC is 9.5% and so is comfortable using this WACC for the project. The risk-free interest rate on CAD is 4.5% and the risk-free interest rate on EUR is 7%.
a. McCain is willing to assume that capital markets in Canada and the European Union are internationally integrated. What is the company’s EUR WACC?
b. What is the present value of the project in EUR?
