International Business Strategy Assignment Example: NPV and Exchange-Rate Risk for a USA vs Europe Expansion

This is a sample written by our team to an International Business Strategy brief: a UK firm choosing between a USA and a Europe expansion. We rebuilt the calculations in our original answer, which priced the wrong figure as the investment and used one undated 6% rate for two currencies. Exchange rates and bond yields below are as at 8 October 2026, and the exchange-rate theory behind them is in our purchasing power parity essay.

What Did the Assignment Ask?

A UK company can put 20 million in local currency into one of two five-year projects: one in the USA, paid for and earning in dollars, and one in Europe, in euros. The brief gave the cash flows below and set four tasks.

1. Assess how viable each project is and justify a discount rate for each.
2. Work out the investment needed in pounds and each project's NPV at spot and at forward exchange rates.
3. Explain how the firm could anticipate exchange-rate changes, and propose how to reduce their impact.
4. Discuss the results and recommend a project.

Cash flows set in the brief (millions, in each project's own currency)

The brief suggested basing each cost of capital on the region's interest rates and inflation; Task 1 does that with dated inputs.

Task 1: How Viable Are the USA and Europe Projects for a UK Firm?

Both are marginal on cash alone. Each returns 25 million over five years on an outlay of 20 million, pays back in 4.4 years and earns an internal rate of return of 6.57% (USA) or 6.34% (Europe). What separates them is the cost of money and the currency risk, and on both counts the dated market data below favour Europe.

USA and Europe projects side by side

Point of comparison	USA project	Europe project
Outlay	USA project $20m, £15.12m at spot	Europe project €20m, £16.95m at spot
Cash in, years 1 to 5	USA project $25m, rising steadily from 2 to 8	Europe project €25m, 16m of it in years 4 and 5
Simple payback	USA project 4.4 years	Europe project 4.4 years
IRR in its own currency	USA project 6.57%	Europe project 6.34%
Five-year government yield	USA project 4.99%	Europe project 3.19%
Discount rate (3-point premium)	USA project 8.14%	Europe project 6.29%
NPV in pounds, forward rates	USA project −£0.74m	Europe project +£0.03m
Largest premium it can bear	USA project 1.51 points	Europe project 3.05 points
Currency volatility against the pound	USA project 6.2% a year	Europe project 3.6% a year
Strategic access	USA project Inside the US tariff wall	Europe project Inside the EU single market

Same total, different timing. The USA project earns its money earlier (2, 4, 5, 6 and 8 million), Europe later (2, 3, 4, 8 and 8). Both stand at −3 million after year 4 and recover it three-eighths into year 5, hence 4.4 years. Earlier cash is worth more at any rate, so the USA has the higher IRR and Europe is more sensitive to the rate chosen.

Cost of money. Five-year government bonds yielded 4.99% in dollars (US Treasury) and 3.19% in euros (ECB AAA curve) on 8 October 2026. A project valued in euros starts with a hurdle almost two points lower, before any judgement about risk.

Currency risk. Over the 12 months to 8 October 2026 the pound moved against the dollar with an annualised volatility of 6.2%, and against the euro with 3.6%. We calculated both from 253 daily changes in the Bank of England's daily spot rates. The sterling value of the euro cash flows is the steadier of the two.

Market access. Goods sent from Britain to the EU travel tariff-free only if they meet the UK-EU preferential rules of origin (HMRC guidance). A subsidiary inside the EU sells across the single market without that friction. In the USA the issue is tariffs: UK goods exports there, excluding precious metals, fell by £1.5 billion (24.7%) in April 2025, when US tariffs were introduced, and the ONS reports they "have remained relatively low since", in figures to February 2026 (ONS, 1 May 2026). Producing inside the US avoids tariffs on finished goods shipped from Britain, which is the strongest strategic case for the USA project.

Inflation. Inflation is highest in the euro area: a September flash estimate of 3.8%, with energy up 18.8% (Eurostat), against 3.4% in the USA (BLS) and 3.1% in the UK (ONS), both for August.

Do not rank the two markets on the World Bank's ease-of-doing-business scores: the World Bank discontinued the Doing Business report in September 2021 (World Bank).

Task 1: Which Discount Rate Should Each Project Use?

Each project should be discounted at a rate for its own currency: the five-year government yield, which already prices the inflation lenders expect, compounded with a premium for project risk. With a 3-point premium, the rates on 8 October 2026 are 8.14% for dollars, 8.14% for pounds and 6.29% for euros, not one 6% for both.

The yields are the Bank of England's five-year nominal par gilt yield (yield curves), the Treasury's five-year par yield and the ECB's five-year par yield on AAA-rated euro-area government bonds. The inflation row is the brief's second input: the latest annual print, not the inflation lenders expect over five years. By the Fisher relation, (1 + nominal rate) = (1 + real rate) × (1 + expected inflation). Measured against the latest print, euro yields sit below inflation and sterling and dollar yields 1.5 to 1.8 points above it. Measured against five-year expectations, the euro real yield need not be negative, which is why the rate is built on the yield.

Why yields and not today's inflation gap. The international Fisher effect scales the sterling rate by the inflation gap instead: 1.0814 × 1.038 ÷ 1.031 − 1 = 8.87% for euros, above sterling, because euro inflation printed highest in September. At 8.87% Europe's NPV would be negative too, as the sensitivity table shows.

Why a 3-point premium. Three points over a government yield is modest for a new cross-border operation: Gormsen and Huber (2025) find from company conference calls that firms' own discount rates sit, on average, about 3 percentage points above their cost of capital, which is itself above the risk-free rate (NBER Reporter). A full answer would estimate the premium from the project's beta against the market (Brealey et al., 2023, section 28-4); without the firm's data, a stated judgement is the honest alternative. The same premium on both projects means the only difference between their rates is the currency's cost of money.

Why compound rather than add. 1.0499 × 1.03 − 1 = 8.14%, against 7.99% if added. Compounding keeps (1 + sterling rate) ÷ (1 + euro rate) equal to (1 + sterling yield) ÷ (1 + euro yield), the same ratio that builds the forward rates, so the two valuation methods in Task 2 agree to the pound.

Assumptions. The brief's cash flows are nominal, after tax and remitted to the UK in the year they arise; each five-year yield applies to every year (a flat yield curve); the outlay is paid today at spot. For a project in a named euro country, use that government's own five-year yield, which may sit above the AAA curve.

Task 2: How Much Does Each Project Cost in Pounds?

At the Bank of England's spot rates for 8 October 2026, $1.3226 and €1.1800 to the pound, the USA project costs £15.12 million and the Europe project £16.95 million. Europe needs £1.83 million more sterling capital for the same 20 million, because a euro is worth more than a dollar.

The investment in pounds at spot, 8 October 2026

USA project outlay

£15.12m $20m at $1.3226 to the pound

Europe project outlay

£16.95m €20m at €1.1800 to the pound

Extra cost of the Europe project

£1.83m Same 20m, stronger currency

$20,000,000 ÷ 1.3226 = £15,121,730
€20,000,000 ÷ 1.1800 = £16,949,153

Task 2: What Are the NPVs at Spot and Forward Rates?

Discounted at the sterling rate of 8.14%, the USA project's NPV is −£0.74 million at both spot and forward rates, because dollar and sterling five-year yields are equal. Europe's NPV is −£0.99 million if the euro stays at spot, but +£0.03 million at forward rates, because the forward market prices a stronger euro. Neither is a convincing return.

How to value a foreign project in pounds

1. 1 Price the outlay at spot $20m ÷ 1.3226 and €20m ÷ 1.1800: the pounds the firm pays today.
2. 2 Set a discount rate per currency Five-year yield compounded with a 3-point premium: 8.14% for pounds and dollars, 6.29% for euros.
3. 3 Derive forward rates Interest-rate parity: spot × [(1 + foreign yield) ÷ (1 + sterling yield)] to the power of the year.
4. 4 Convert each year's cash flow At spot for the no-change case, at that year's forward rate for the market case.
5. 5 Discount at the sterling rate 8.14% for both projects, because the cash is now in pounds.
6. 6 Cross-check in local currency Local NPV at the local rate, converted at spot, must match the forward-rate NPV.

The spot case holds today's rate for every year, as if the currency never moved; the forward case uses each year's forward rate. Both are discounted at the sterling rate, because the cash is now in pounds.

Forward Rates by Interest-Rate Parity

Covered interest-rate parity sets the forward rate so that holding either currency earns the same: F_t = S × [(1 + y_foreign) ÷ (1 + y_£)]^t, with rates quoted as foreign currency per pound (Brealey et al., 2023). The dollar term is 1.0499 ÷ 1.0499 = 1, so the dollar forwards equal spot. The euro term is 1.0319 ÷ 1.0499 = 0.98286, so the pound buys 1.71% fewer euros each year. These are rates derived from yields, not bank quotes; a bank would add its spread.

USA Project NPV in Pounds

Spot and forward conversion give the same pounds for the USA project, so one table serves both cases. Each dollar figure is divided by 1.3226 and multiplied by the discount factor 1 ÷ 1.0814^t.

Europe Project NPV in Pounds

Here the two cases part: at forward rates each later euro buys more pounds, adding £1.02 million of present value over the five years.

Holding the euro at spot while discounting at the sterling rate charges the project sterling's higher interest rate without crediting the stronger euro that the same rate gap implies. That is why the spot case undervalues the Europe project, and why the brief asks for both.

Cross-Check, IRR and Break-Even Premium

Valued the other way, in each project's own currency at its own rate and converted at spot, the answers match the forward-rate NPVs: −$0.979m ÷ 1.3226 = −£0.740m, and +€0.036m ÷ 1.1800 = +£0.030m. They match because the forward rates and the discount rates are built from the same yields; if your two methods disagree by more than rounding, one of your rates is inconsistent.

An IRR in pounds differs from the IRR in the project's currency when the currency is expected to move: Europe's 6.34% in euros becomes 8.19% in pounds at forward rates, just over the 8.14% sterling hurdle. The break-even premium is the IRR with the yield taken out: 1.0657 ÷ 1.0499 − 1 = 1.51 points for the USA, and 1.0634 ÷ 1.0319 − 1 = 3.05 points for Europe.

How Sensitive Are the NPVs to the Discount Rate?

Very. The table applies one rate to both projects, so you can see where each crosses zero. At 6% both NPVs are positive but small, $0.376m and €0.230m, under 2% of the outlay. The USA turns negative above 6.57%, Europe above 6.34%, and at 7% both are below zero.

NPV in pounds against the discount rate, both projects

Chart data

Point (%)	USA project	Europe project
4	1.34 £m	1.41 £m
4.5	1.07 £m	1.1 £m
5	0.8 £m	0.79 £m
5.5	0.54 £m	0.49 £m
6	0.28 £m	0.19 £m
6.5	0.04 £m	-0.09 £m
7	-0.21 £m	-0.37 £m
7.5	-0.44 £m	-0.64 £m
8	-0.68 £m	-0.91 £m
8.5	-0.9 £m	-1.17 £m
9	-1.12 £m	-1.43 £m

Task 3: How Can a Firm Anticipate Exchange-Rate Changes?

It cannot predict them, but it can set a range. Interest-rate parity gives the market's forward path, purchasing power parity gives an inflation-based path, and recent volatility gives the width of the band. For the euro the two paths currently point in opposite directions, so the honest forecast for this project is a band, not a single rate.

Purchasing power parity says the currency with the higher inflation should weaken by roughly the gap: 1.034 ÷ 1.031 − 1 = 0.29% a year for the dollar and 1.038 ÷ 1.031 − 1 = 0.68% for the euro, the opposite of the forward path for the euro. Brealey et al. (2023) set out both relationships and their limits, and our essay on exchange-rate theory and PPP tests PPP against real prices.

Volatility sets the width. One standard deviation over five years is the annual figure times the square root of five: 6.17% × √5 ≈ 13.8% for the dollar and 3.61% × √5 ≈ 8.1% for the euro. On the USA project's year-5 inflow of $8m, worth £6.05m at spot, that is about £0.83m either way, larger than either project's whole NPV.

Central-bank decisions move rates within that band. The Federal Reserve raised its target range to 3.75% to 4.00% from 17 September 2026 (Federal Reserve), the ECB raised its deposit facility rate to 2.50% from 16 September (ECB), and the Bank of England has held Bank Rate at 3.75% throughout 2026 (Bank of England). The next decisions fall on 28 October, 29 October and 5 November 2026.

A scenario table turns the band into money. Here every inflow is converted at a rate 10% stronger or weaker for the pound than the forward rate, and the outlay stays at spot.

A 10% move, inside one standard deviation for the dollar over five years, shifts either NPV by £1.3 million to £1.9 million. The currency decides more of this appraisal than the projects do.

Task 3: How Can the Firm Reduce Its Currency Risk?

Match first, then hedge. Borrow about half of each outlay in the project's currency, so the debt falls in value when the asset does. Sell the first two years' cash flows forward, and buy options only for the larger, less certain cash of years 3 to 5.

ACCA's technical article on foreign currency risk supports the three hedging rows (Garrett, n.d.). Local borrowing works because translation risk "can be partially overcome by funding the foreign subsidiary using a foreign loan". Euro debt pays a coupon about 1.80 points under sterling, but the stronger euro that the forward rates price takes that saving back: borrow euros for the match, not the rate. A forward is "a binding agreement to sell (deliver) or buy an agreed amount of currency", so the firm must deliver even if a cash flow falls short and should cover only cash it is confident of. Options give "the right, but not the obligation" to exchange, which suits the larger, less certain cash of years 3 to 5, and their premiums rise with volatility: dearer on the dollar (6.2% a year) than the euro (3.6%).

Task 4: Which Project Should the Firm Choose?

On these numbers neither project earns enough to justify 20 million on financial grounds alone. If the board must choose one, it should be Europe: it breaks even at its euro hurdle (+£0.03 million) where the USA loses £0.74 million, it can bear a risk premium of 3.05 points against 1.51, and its currency is steadier against the pound.

What would change the answer. To reach a zero NPV at 8.14%, the USA project needs about 5.1% more cash in every year ($8.41m in year 5) or, if only the last year changes, $9.45m instead of $8m. It would clear its hurdle if the board valued a production base inside the US tariff wall at more than £0.74 million, and overtake Europe above £0.77 million, or if dollar yields fell well below sterling's. Europe's case weakens if the board asks more than a 3-point premium of a new market, or if euro-area inflation keeps rising and the cash flows do not rise with it.

Recommendation. Proceed with Europe only if the board accepts a premium of no more than 3 points, about half the outlay is financed in euros with the first two years' cash flows sold forward, and the appraisal is re-run with new yields after the October and November rate decisions. Do not commit to the USA project on these cash flows unless its strategic value is priced into them. This is a coursework answer about a hypothetical firm, not advice on a real investment or hedge.

How Would a Marker Grade This Answer?

Tasks 1 and 2 rest on numbers a student has to find and justify: the pound outlay, a discount rate per currency, forward rates and a sensitivity test. Our original version of this sample missed all four, which is why we rebuilt it. Each fault below costs marks in this kind of brief.

• NPV is not the investment. The outlay is $20m and €20m converted at spot, not a converted NPV.
• One rate for two currencies. Dollar and euro yields differ, so their discount rates differ; an asserted 6% earns little.
• Spot only. Without forward rates the answer cannot show the currency effect, worth £1.02 million to Europe here.
• NPVs compared across currencies. $0.376m is not "more" than €0.230m until both are in pounds.
• Certainty from a thin margin. An NPV under 2% of the outlay calls for a sensitivity table, not a promise of profit.
• Generic lists and unrelated sources. Forecasting and hedging methods earn marks only when applied to these projects, and every source has to support the sentence it sits in: a central bank's data series, a textbook or a professional body's article, not a paper on another subject.
• Undated rates. "At present" means nothing a month later; every rate needs a date and a source.

Related samples: our International Business Strategy reflection report using CAGE and VRIO, cultural differences in business between the US and Japan and an investment analysis sample on diversification and the Sharpe ratio. More samples sit in MBA assignment samples, and our MBA assignment help covers international business and corporate finance.

Need an international business strategy or investment appraisal assignment worked through with dated rates and every calculation shown? Send us the brief and your deadline on WhatsApp.

Sources

• Bank of England (2026) Bank of England Database: spot exchange rates, US dollar and euro into sterling (XUDLUSS, XUDLERS), and five-year nominal par gilt yield (IUDSNPY), daily, 8 October 2025 to 8 October 2026. bankofengland.co.uk. Accessed 13 October 2026. Source of the spot rates, the gilt yield and the volatility calculation.
• Bank of England (2026) Yield curves. bankofengland.co.uk. Accessed 13 October 2026.
• Bank of England (2026) Interest rates and Bank Rate. Bank Rate 3.75%; next decision 5 November 2026. bankofengland.co.uk. Accessed 13 October 2026.
• Board of Governors of the Federal Reserve System (2026) Open market operations, federal funds target range. federalreserve.gov. Accessed 13 October 2026.
• Board of Governors of the Federal Reserve System (2026) Meeting calendars and information, FOMC meeting of 27 to 28 October 2026. federalreserve.gov. Accessed 13 October 2026.
• Brealey, R.A., Myers, S.C., Allen, F. and Edmans, A. (2023) Principles of Corporate Finance. 14th edn. New York: McGraw Hill, ch. 28, International Financial Management (sections 28-2 Some Basic Relationships, 28-3 Hedging Currency Risk and 28-4 International Investment Decisions). mheducation.com. Accessed 13 October 2026.
• European Central Bank (2026) Euro area yield curves: AAA-rated government bonds, five-year par yield. data.ecb.europa.eu. Accessed 13 October 2026.
• European Central Bank (2026) Key ECB interest rates. ecb.europa.eu. Accessed 13 October 2026.
• European Central Bank (2026) Meetings of the Governing Council, monetary policy meeting of 28 to 29 October 2026. ecb.europa.eu. Accessed 13 October 2026.
• Eurostat (2026) Euro area annual inflation up to 3.8%, flash estimate for September 2026, euro indicators release of 2 October 2026. ec.europa.eu. Accessed 13 October 2026.
• Garrett, K. (n.d.) Foreign currency risk and its management. ACCA Financial Management technical article. accaglobal.com. Accessed 13 October 2026.
• Gormsen, N.J. and Huber, K. (2025) 'Corporate discount rates', American Economic Review, 115(6), pp. 2001–2049. doi.org/10.1257/aer.20231246. Summarised by the authors in 'Firms' discount rates and investment', NBER Reporter, 2025 no. 3: nber.org. Accessed 13 October 2026.
• HM Revenue and Customs (2021) Introduction to rules of origin and claiming duties when trading between the UK and EU. GOV.UK. gov.uk. Accessed 13 October 2026.
• Office for National Statistics (2026) CPI annual rate 00: all items (D7G7), August 2026, released 16 September 2026. ons.gov.uk. Accessed 13 October 2026.
• Office for National Statistics (2026) UK trade with the United States: exports and imports of goods following the introduction of US tariffs, April 2025 to February 2026, 1 May 2026. ons.gov.uk. Accessed 13 October 2026.
• US Bureau of Labor Statistics (2026) Consumer Price Index for All Urban Consumers (CPI-U), all items, not seasonally adjusted (CUUR0000SA0), August 2026. data.bls.gov. Accessed 13 October 2026.
• US Department of the Treasury (2026) Daily Treasury par yield curve rates, October 2026. home.treasury.gov. Accessed 13 October 2026.
• World Bank (2021) World Bank Group to discontinue Doing Business report, statement, 16 September 2021. worldbank.org. Accessed 13 October 2026.

Exchange rates and bond yields are as at 8 October 2026, policy rates as at 13 October 2026, and inflation is the latest release on 13 October 2026. The refresh triggers after those dates are US CPI for September (14 October), the final euro-area HICP (16 October), UK CPI for September (21 October) and the rate decisions of 28 October, 29 October and 5 November 2026.