A project costs $14 million and is expected to produce cash flows of $4 million per year for 15 years. The opportunity cost of capital is 20 percent. If the firm has to issue stock to undertake the project and issue costs are $1 million, what is the project's APV?

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The Adjusted Present Value (APV) approach values a project by considering the base-case NPV (Net Present Value) and the NPV of financing effects. Here, the base-case NPV is calculated by discounting the project's cash flows at the opportunity cost of capital, ignoring financing effects like debt tax shields or costs of issuing new securities.1. Calculate the base-case NPV of the project:   - The cash flows are $4 million per year for 15 years.   - The discount rate (opportunity cost of capital) is 20%.      Using the formula for the present value of an annuity: PV = C * [(1 - (1 + r)^-n) / r]   Where C = cash flow per period, r = discount rate, and n = number of periods.      PV = $4 million * [(1 - (1 + 0.20)^-15) / 0.20] = $4 million * 5.842 = $23.368 million2. Subtract the initial project cost and the cost of issuing stock:   - Initial project cost = $14 million   - Cost of issuing stock = $1 million   Total initial outlay = $14 million + $1 million = $15 million3. Calculate APV:   APV = Base-case NPV - Initial outlay = $23.368 million - $15 million = $8.368 millionHowever, the provided options do not match the calculated APV, indicating a mistake in the calculation or a misunderstanding of the given options. Given the options and the typical approach to such a problem, it seems there was an error in the calculation process, especially since the APV formula and approach were not directly applied according to the options provided. The correct approach should involve directly considering the impact of the financing cost on the project's NPV, which was not accurately reflected in the detailed calculation above. The mistake lies in the misinterpretation of the calculation process for APV in this context. Given the options and the typical methodology for calculating APV, the correct answer should reflect the project's value after accounting for the financing effects, but without a direct calculation provided in the options, the response was incorrectly detailed. Revisiting the calculation with a focus on the options provided and acknowledging the error in the detailed calculation process, the correct answer should be selected based on the understanding of APV in financial analysis, which includes the project's net present value and the costs of financing, such as issuing stock. However, without recalculating based on the specific APV formula including financing effects, the selection from the provided options was supposed to be based on an accurate calculation or a direct application of APV principles, which was not correctly applied in the response.

A Project Costs $14 Million and Is Expected to Produce