Question

You expect a project’s post-tax incremental cash flows to start at $2,000 next year (t=1) and grow by 4% per year until time 11. Beginning after time 11, you expect cash flows to grow at 3% in perpetuity. Assuming an opportunity cost of capital of 12% what is the value today (at t=0) of the after-tax terminal value at time 10 (i.e., the present value of cash flows arriving after t=10)?
$10,566
$10,260
$11,243
$11,436
NONE OF ABOVE

Answer 1

You expect a project’s post-tax incremental cash flows to start at $2,000 next year (t=1) and grow by 4% per year until time 11. Beginning after time 11, you expect cash flows to grow at 3% in perpetuity. Assuming an opportunity cost of capital of 12% what is the value today (at t=0) of the after-tax terminal value at time 10 (i.e., the present value of cash flows arriving after t=10)?
$10,566
$10,260
$11,243
$11,436
NONE OF ABOVE

Post-Tax increment cash flow next year (C1) = $2000

Growth rate thereafter till year 11(g1) = 4%

Growth rate after year 11 in perpetuity(g2) = 3%

Opportunity cost of capital (kc) = 12%

First we will calculate the after-tax terminal value at time 10:-

Value = $2643.29 + 30251.02

Value = $ 32894.31

So, the value of after-tax terminal value at time 10 is $ 32,894.31

Now, we will convert it into value at today from time 10 using Time value of money:-

Value today = $32894.31/(1+0.12)^10

Value today = $32894.31*0.32197

Value today = $10,591.08

So, the  value today (at t=0) of the after-tax terminal value at time 10 is $ 10,591.08

Hence, Option E. none of the above\

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