Consider an investment that pays $18.8 in year 1, and then stabilizes and pays $6.18 every year forever after that (the first cash flow is in year 2) This firm does not intend to grow and has an interest rate (required rate of return) of 9%. What is the present value of this investment opportunity? Give your answer to two decimals
required rate= | 9.00% | ||||||
Year | Previous year FCF | FCF growth rate | FCF current year | Horizon value | Total Value | Discount factor | Discounted value |
1 | 0 | 0.00% | 18.8 | 18.8 | 1.09 | 17.2477 | |
2 | 18.8 | 0.00% | 6.18 | 68.667 | 74.847 | 1.1881 | 62.99722 |
Long term growth rate (given)= | 0.00% | Value of Investment= | Sum of discounted value = | 80.24 |
Where | |||
Total value = FCF + horizon value (only for last year) | |||
Horizon value = FCF current year 2 *(1+long term growth rate)/( required rate-long term growth rate) | |||
Discount factor=(1+ required rate)^corresponding period | |||
Discounted value=total value/discount factor |
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