Question

The One Corporation is about to begin producing and selling its prototype product. Annual cash flows...

The One Corporation is about to begin producing and selling its prototype product. Annual cash flows for the next five years are forecasted as:

            Year                 Cash Flow

            1                    -$40,000

            2                      -$20,000

            3                      $100,000

            4                      $400,000

            5                      $850,000

Assume annual cash flows are expected to remain at the $850,000 level after Year 5 (i.e., Year 6 and thereafter). If The One investors want a 40 percent rate of return on their investment, calculate the terminal value (10 points) and calculate the venture’s present value. Show detailed work, please. Thank you so much!

Homework Answers

Answer #1
Terminal value at the end of year 5 = Cash flow for year 6/ required rate
=$850000/40%
=$2125000
Year Cash Flow PV Factor PV Of Cash Flow
a b c=1/1.40^a d=b*c
1 $       -40,000 0.71429 $     -28,571.43
2 $       -20,000 0.51020 $     -10,204.08
3 $     1,00,000 0.36443 $       36,443.15
4 $     4,00,000 0.26031 $   1,04,123.28
5 $     8,50,000 0.18593 $   1,58,044.27
5 $   21,25,000 0.18593 $   3,95,110.67
Present value $   6,54,945.86
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