You invest $100 (at time 0) and expect to receive $115 in cash in one year. Your required return is 9 percent.
a) Calculate the value of your investment at time 0 using discounted cash flow techniques.
b) Calculate the value of your investment using residual earnings techniques
c) Suppose that your accountant demanded that you expense $20 of your investment immediately such that the book value of the investment was $80 at time 0. Calculate the value of your investment under this accounting.
(a) Value of Investment using DCF technique
Time 0 Cash Flow = -100
Time 1 Cash Flow = -115
Discount Rate = 9%
Value of Investment = -100+115/1.09 = $5.5 ...
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