Question

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

Answer #1

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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