Question

A project generates cash flows of $125k, $125k, and $95k. The required rate of return is...

A project generates cash flows of $125k, $125k, and $95k. The required rate of return is 10%.

The highest price that a firm/investor will pay for this project is_____. Hint: The price of the project is the same as the investment cost.

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Answer #1
Project
Discount rate 10.000%
Year 0 1 2 3
Cash flow stream 0 125000 125000 95000
Discounting factor 1.000 1.100 1.210 1.331
Discounted cash flows project 0.000 113636.364 103305.785 71374.906
NPV = Sum of discounted cash flows
NPV Project = 288317.05 = price paid
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
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