A small manufacturing plant costs $50 M today. It is expected to have the following cash flows:
Year 1: $5M. Year 2: $9 M, Year 3: $10 M, and Year 4 = $11M. Risk adjusted cost of capital is 15% and the company is projected to grow at a constant rate of 3% for perpetuity after year 4.
Do you advise to invest in this project, why? Show your work. If you use a financial calculator, explain which buttons do you push?
Present Value of growing perpetuity = Period 1 cash flow / (discount rate - growth rate)
Cash flow in year 4 = 11M
So present value (this is ...
This solution contains step-by-step calculations to determine the present value of growing perpetuity.