Tashakori Trucking, a U.S.-based company, is considering expanding its operations into a foreign country. The required investment at Time = 0 is $10 million. The firm forecasts total cash inflows of $4 million per year for 2 years, $6 million for the next 2 years, and then a possible terminal value of $8 million. In addition, due to political risk factors, Tashakori believes that there is a 50% chance that the gross terminal value will be only $2 million and a 50% chance that it will be $8 million. However, the government of the host country will block 20% of all cash flows. Thus, cash flows that can be repatriated are 80% of those projected. Tashakori's cost of capital is 15%, but it adds one percentage point to all foreign projects to account for exchange rate risk. Under these
conditions, what is the project's NPV?
A. $1.01 million
B. $2.77 million
C. $3.09 million
D. $5.96 million
E. $7.39 million
Answer: B
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