1. 14.

Capital budgeting [LO 21.2] Lakonishok Equipment has an investment opportunity in Europe. The project costs €10.5 million and is expected to produce cash flows of €1.7 million in Year 1, €2.4 million in Year 2 and €3.3 million in Year 3. The current spot exchange rate is €0.94/$ and the current risk-free rate in Australia is 2.3 per cent, compared to that in Europe of 1.8 per cent. The appropriate discount rate for the project is estimated to be 13 per cent, the Australian cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €7.9 million. What is the NPV of the project?