An investment opportunity has just paid a cash flow of $4,920.The cash flow from this...

An investment opportunity has just paid a cash flow of $4,920. The cash flow from this investment is expected to grow at a constant growth rate of 6% for its expected life of 35 years. What is the fair value of this opportunity today if its required rate of return is 9%?

Expert Solution

Value of opportunity = Cash flow₁ * (1+g) / (1+r) + Cash flow₂ * (1+g)² / (1+r)² + ......+ Cash flow₃₅ * (1+g)³⁵ / (1+r)³⁵

= 4920 * 1.06 / 109 + 4920 * 1.06² / 109² + ...... + 4920 * 1.06³⁵ / 109³⁵

= 4920 * [ 1.06 / 1.09 + 1.06² / 109² + ...... + 4920 * 1.06³⁵ ]

It is geometric progression with first term, a = 1.06/1.09 and common ratio, r = 1.06/1.09

Sum of GP = a * ( 1 - rⁿ ) / ( 1 - r )

= 4920 * [ 1.06/1.09 * ( 1 - (1.06/1.09)³⁵ ) / ( 1 - 1.06/1.09) ]

= 4920 * [ 0.9725 * ( 1 - 0.9725³⁵ ) / ( 1 - 0.9725 ) ]

= 4920 * [ 0.9725 * 0.6235 ] / 0.0275

= 4920 * 22.0492

= $ 108,482.20

The value of an opportunity is $ 104,482.20.

jeff jeffy answered 2 years ago

An investment opportunity has just paid a cash flow of $2460. The cash flow from this...

An investment opportunity has just paid a cash flow of $2460. The cash flow from this investment is expected to grow at a constant growth rate of 6% for its expected life of 35 years. What is the fair value of this opportunity today if its required rate of return is 9%?

Indicate whether the account is an Operating Cash Flow (O); Cash Flow From Investment (I) or...

Indicate whether the account is an Operating Cash Flow (O); Cash Flow From Investment (I) or Cash Flow from Financing (F) also indicate whether the activity is a Source (+) or Use (-) of funds. __________ Increase in Accounts Receivable __________ Increase in Accounts Payable ___________ Increase in Notes Payable ___________Payment of Cash Dividends to Shareholders ___________ Increase or purchase of equipment

Describe and explain three different cash flows: operating cash flow, investment cash flow, and cash flow...

Describe and explain three different cash flows: operating cash flow, investment cash flow, and cash flow from financing activities. What is the relative importance of each, and what factors impact your assessment? Does it vary by industry or business maturity? Imagine that you were structuring a business from the ground up--what percentage of cash flow would you target for each of these three types?

The OMEGA Corporation has been presented with an investment opportunity that will yield cash flows of...

The OMEGA Corporation has been presented with an investment opportunity that will yield cash flows of $60,000 per year in Years 1 through 4, $70,000 per year in Years 5 through 9, and $80,000 in Year 10. This investment will cost the firm $300,000 today, and the firm’s cost of capital is 10 percent. Assume cash flows occur evenly during the year, 1/365th each day. What is the payback period for this investment? a. 5.23 years b. 4.86 years c....

Annual cash inflows from two competing investment opportunities are given below. Each investment opportunity will require...

Annual cash inflows from two competing investment opportunities are given below. Each investment opportunity will require the same initial investment. Compute the present value of the cash inflows for each investment using a 20% discount rate. Year Investment X Investment Y 1 $500 2,000 2 1,000 1,500 3 1,500 1,000 4 2,000 5,00 Total $5,000 $5,000 At the end of three years, when you graduate from college, your father has promised to give you a used car that will cost...

Listed below are yearly forecasts of “free cash flow” (operating cash flow plus investment-related cash flow)...

Listed below are yearly forecasts of “free cash flow” (operating cash flow plus investment-related cash flow) for Tomkat LLC. Year Cash Flow 2020 -$2.8 million. 2021 -$2.0 million. 2022 -$1.2 million. 2023 -$0.2 million. 2024 $0.9 million. 2025 $2.2 million. After year 2025, cash flows are anticipated to grow by 3% per year, in perpetuity. For simplicity, assume all that cash flows occur at the end of each year. Assume a discount rate of 8% per year. What is the...

Lipper Group has a project opportunity that requires $450initial investment (cash outflows) today and this...

Lipper Group has a project opportunity that requires $450 initial investment (cash outflows) today and this project is expected to generate cash inflows of $150 in year 1, $175 in year 2, $X in year 3, and $225 in year 4. If the project rate of return is 10%, calculate the project cash inflow in year 3 (calculate what is $X)?

The Seattle Corporation has been presented with an investment opportunity which will yield cash flows of...

The Seattle Corporation has been presented with an investment opportunity which will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $100,000 today, and the firm's cost of capital is 10%. Assume cash flows occur evenly during the year. The discounted payback period is A. 3.72 years. B. 4.26 years. C. 5.23 years. D. 4.35 years.

Huggins Co. has identified an investment project with the following cash flows. Year Cash Flow...

Huggins Co. has identified an investment project with the following cash flows. Year Cash Flow 1 $ 900 2 1,290 3 1,550 4 1,725 If the discount rate is 7 percent, what is the present value of these cash flows? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Present value $ What is the present value at 20 percent? (Do not round intermediate calculations and round your answer to 2 decimal places,...

Wilkinson Co. has identified an investment project with the following cash flows: Year Cash Flow...

Wilkinson Co. has identified an investment project with the following cash flows: Year Cash Flow 1 $ 760 2 1,010 3 1,270 4 1,375 If the discount rate is 11 percent, what is the present value of these cash flows? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) If the discount rate is 18 percent, what is the present value of these cash flows? (Do not round intermediate calculations and round...

Question