Question

Consider an investment that pays $18.8 in year 1, and then stabilizes and pays $6.18 every...

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

Homework Answers

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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