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Lakonishok Equipment has an investment opportunity in Europe.The project costs €10 million and is expected to produce cash flowsof €1.0 million in Year 1, €1.4 million in Year 2, and €2.5 millionin Year 3. The current spot exchange rate is $1.25/€; and thecurrent risk-free rate in the United States is 1.8 percent,compared to that in Europe of 1.0 percent. The appropriate discountrate for the project is estimated to be 10 percent, the U.S. costof capital for the company. In addition, the subsidiary can be soldat the end of three years for an estimated €8.0 million. What isthe NPV of the project?
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