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Consider panel A of Exhibit 1, which shows the cash flows of the project as originally envisioned, based on a five-year lease of the location. What is this project’s net present value (NPV)?

$11.9 million

$26.8 million

$18.2 million

$21.3 million

$14.1 million

To calculate the Net Present Value (NPV) of the project based on Panel A in Exhibit 1, we will use the following formula for NPV:

\[
\text{NPV} = \sum_{t=0}^{n} \frac{C_t}{(1 + r)^t}
\]

Where:
- $ C_t $ = cash flow at time $ t $
- $ r $ = discount rate (company's hurdle rate, which is 8% or 0.08)
- $ t $ = year (from 0 to 5)

From Panel A, the cash flows for each year are:

- Year 0: $-\$40.0$ million (initial investment)
- Year 1: $ \$6.2$ million
- Year 2: $ \$10.0$ million
- Year 3: $ \$12.8$ million
- Year 4: $ \$16.6$ million
- Year 5: $ \$22.4$ million

Now let's calculate the NPV step by step.The Net Present Value (NPV) of the project, based on Panel A, is approximately **$11.92 million**. Therefore, the closest option is:

**$11.9 million**.

Would you like further details or have any questions? Here are some related questions to deepen your understanding:

1. How would the NPV change if the discount rate increased to 10%?
2. What is the internal rate of return (IRR) for this project based on the cash flows in Panel A?
3. How does the NPV change if the initial investment is reduced by 10%?
4. What is the payback period for this project?
5. How would the NPV calculation change if cash flows are expected to grow annually?

**Tip**: Always compare NPV with other metrics like IRR to get a comprehensive understanding of a project's financial viability.

Consider panel A of Exhibit 1, which shows the cash flows of the project as originally envisioned, based on a five-year lease of the location. What is this project’s net present value (NPV)?

Learn how to calculate the net present value (NPV) of a five-year investment project based on an initial cash outlay and annual cash flows. This example uses an 8% discount rate and a detailed step-by-step breakdown of the NPV formula, making it suitable for finance students and professionals.

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