Project Financing Dryden Co. is a U.S. firm that plans a foreign project in which it needs $\$ 8$ million as an initial investment. The project is expected to generate cash flows of 10 million euros in one year after the complete repayment of the loan (including the loan interest and principal). The project has zero salvage value and will be terminated at the end of one year. Dryden considers financing this project using the following options:
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
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?
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