A U.S. company is assessing whether to invest in a project in Australia. The project requires an initial investment of ten million Australian Dollars (AUD) but will return cash flows of eight million AUD in year one and five million AUD in year 2.
The risk-adjusted cost of capital for a similar U.S. project is 10% and the current spot exchange rate is 1.25AUD per $1.
If U.S. government bond rates are 1% for one-year and 2% for 2 years while Australian government bond rates are 2% for 1-year and 3% for 2-years, is the project worth investing in?