- This topic has 1 reply, 2 voices, and was last updated 9 years ago by
.
- Posts
Comment briefly on the proposal to use a four-year time horizon, and calculate and discuss a value that could
be placed on after-tax cash flows arising after the fourth year of operation, using a perpetuity approach.
Assume, for this part of the question only, that before-tax cash flows and profit tax are constant from year
five onwards, and that capital allowances and working capital can be ignored.
sir why the answer is divided by 0.12
as the perpetuity
I did 1/0.12 =122308* 1(1-.3) /12
i dont understand why 0.12 is used
why this
2,308,000 x (1 – 0·3)/0·12 = $13,463,000
The year zero present value of these cash flows = 13,463,000 x 0·636 = $8,562,468
If one year’s inflation is included:
2,308,000 x 1·03 x (1 – 0·3))/0·12 = $13,867,000
shouldnt it be divided by 3.037 instead? i really dont understand anything.To discount a perpetuity at 12% you multiply by 1/0.12 (which is not equal to 12 !!!)
The question says that the cost of capital is 12% which is why we discount at 12%
Multiplying by 1/0.12 gives the PV of a perpetuity assuming that the first flow is in 1 years time. Here, the perpetuity starts in 5 years time, which is 4 years later. Therefore multiplying by 1/0.12 gives a PV four years later – i.e. at time 4 instead of time 0.
Therefore we then need to discount for 4 years at 12% to get to the PV.Why do you want to divide by 3.037?
- You must be logged in to reply to this topic.