24. Cash flows from an e-commerce venture amount to $1 million in the current year, with...

24. Cash flows from an e-commerce venture amount to $1 million in the current year, with an expected growth rate of 4% forever. Assuming a required rate of 12%, what is the value of this venture at the present time?

A. $12.5 B. $12,500,000 C. $12,500 D. $13,000,000 E. $125,000

Expert Solution

24. Cash flows from an e-commerce venture amount to $1 million in the current year, with an expected growth rate of 4% forever. Assuming a required rate of 12%, what is the value of this venture at the present time?

Answer: D. $13,000,000

Working

Since growth rate is constant, we can use the following formula for calculating the value of the venture.

Value of the venture = (Current year cash flow * (1 + Growth rate)) ÷ (Required rate - Growth rate)

= $1,000,000 * (1 + 0.04) ÷ (0.12 – 0.04)

= $1,040,000 ÷ 0.08

= $13,000,000

Where

Current year cash flow = $1,000,000 (provided in the question)
Growth rate = 4% (provided in the question)
Required rate = 12% (provided in the question)

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