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- This topic has 3 replies, 2 voices, and was last updated 3 years ago by John Moffat.

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- June 7, 2021 at 2:02 pm #623649
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 125Cash 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?June 7, 2021 at 4:01 pm #623681As 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.

June 7, 2021 at 8:01 pm #623750Understood. I appreciate the guidance. Thank you Sir!

June 8, 2021 at 8:22 am #623825You are welcome 🙂

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