Explanation

The correct answer is A ($85 million). The net present value (NPV) is calculated as the present value of future after-tax cash flows minus the initial investment outlay.

1. After-tax cash flow calculation:

   • Annual before-tax cash flow: $50 million
   • After-tax cash flow: $50 million * (1 - 0.15) = $42.5 million

2. Present value of after-tax cash flows:

   • Parameters:
     • PMT (payment per period): $42.5 million
     • N (number of periods): 6
     • Interest rate: 12%
   • Present value: $174.7 million

3. NPV calculation:

   • NPV = Present value - Initial outlay
   • NPV = $174.7 million - $90 million = $84.7 million ≈ $85 million

Why not B or C?

• B ($116 million): Incorrectly uses the before-tax cash flow ($50 million) instead of the after-tax cash flow ($42.5 million), leading to an inflated NPV.
• C ($175 million): Omits the initial cash outlay, resulting in an NPV equal to the present value of cash flows alone.