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    Present Value of Growing Perpetuity in Investment

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    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?

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    Solution Preview

    Present Value of growing perpetuity = Period 1 cash flow / (discount rate - growth rate)

    Cash flow in year 4 = 11M

    So present value (this is ...

    Solution Summary

    This solution contains step-by-step calculations to determine the present value of growing perpetuity.