Expected present value
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The followings are the forecasted financial information on ABC Company:
Year : 0 / 1 / 2 / 3 / 4 to n
Accounting profit (millions) : 0.9 / 0.9 / 0.9 / 0.9 / 0.96
Net cash flow (millions) : -5.8 / 0.7 / 2.1 / 3.8 / 0.58
Without doing any calculation, any mistakes(s) made in the following calculation:
<< The current deposit interest rate offered by banks is about 3% annually, the present value of business :
= -5.8 + 0.7/(1+3%)^1 + 2.1/(1+3%)^2 + 3.8/(1+3%)^3 + 0.58/(1+3%)^4
= total expected present value >>.
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Solution Summary
The solution spots error in expected present value calculations.
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The cash flows should be discounted at a rate that reflects the risk of the cash flows.
The discount rate used in the ...
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