Question

You own a store that is expected to make annual cash flows forever. The cost of capital for the store is 8.65 percent. The next annual cash flow is expected in one year from today and all subsequent cash flows are expected to grow annually by 4.14 percent. What is the value of the store if you know that the cash flow in 3 years from today is expected to be 15,100?

Answer 1

Cash Flow in Year 3 = $15,100
Growth Rate = 4.14%
Cost of Capital = 8.65%

Cash Flow in Year 3 = Cash Flow in Year 1 * (1 + Growth Rate)^2
$15,100 = Cash Flow in Year 1 * 1.0414^2
$15,100 = Cash Flow in Year 1 * 1.084514
Cash Flow in Year 1 = $13,923.2878

Present Value of Store = Cash Flow in Year 1 / (Cost of Capital - Growth Rate)
Present Value of Store = $13,923.2878 / (0.0865 - 0.0414)
Present Value of Store = $13,923.2878 / 0.0451
Present Value of Store = $308,720.35