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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 Summary

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

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 provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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