Question

The SoCal Corp is about to begin producing and selling its prototype product. Annual cash flows for the next five years are forecasted as:

            Year                 Cash Flow

            1                    -$40,000

            2                      -$20,000

            3                      $100,000

            4                      $400,000

            5                      $850,000

Assume annual cash flows are expected to remain at the $850,000 level after Year 5 (i.e., Year 6 and thereafter). If investors want a 40 percent rate of return on their investment, calculate the terminal value and calculate the venture’s present value.

Answer 1

Terminal value at the end of year 5 = Cash flow for year 6/ required rate
=$850000/40%
=$2125000
Year	Cash Flow	PV Factor	PV Of Cash Flow
a	b	c=1/1.40^a	d=b*c
1	$       -40,000	0.71429	$         -28,571.43
2	$       -20,000	0.51020	$         -10,204.08
3	$     1,00,000	0.36443	$           36,443.15
4	$     4,00,000	0.26031	$       1,04,123.28
5	$     8,50,000	0.18593	$       1,58,044.27
5	$   21,25,000	0.18593	$       3,95,110.67
Present value	$       6,54,945.86