Sir please help me understand how we calculate the PV of the perpetuity from yr6 to infinity. the Pv for yr 1-5 is 718.555
A company is considering an investment of $800,000 in new product. The product is expected to yield incremental net cash flows over the next five years as follows:
YR. Profits.
1 100
2 125
3 140
4 165
5 125
Cash flows are expected to grow at a rate of 3% per year after year five to infinity. Assume a discount factor of 14%.
The net present value of the project is?
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Discounted - Perpetuity
5y ago#1As I explain in my free lectures, you use the growth model formula provided on the formula sheet for the flows from time 6 onwards.
However the growth model gives the PV now (time 0) when the first flow is at time 1. Here the first flow is at time 6 which is 5 years later than time 1, and so the formula gives a PV 5 years later than time 0. Therefore the answer from the growth model needs discounting for 5 years at 14% to get a PV at time 0.
Understood. I appreciate the guidance. Thank you Sir!
5y ago#3You are welcome :-)
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