Question

Here is the question. I understand what the answer is but need to know how you calculate the PV at 12% in year 5 to equal .567.

You have worked in XYZ Corporation for the last five years and have a more optimistic view of the firm's future FCFs. In your personal/professional opinion, XYZ could generate $4 million FCF next year, $4.5 million in year two, $5 million in year three, $5.5 million in year four, $6 million in year five, and then maintain a FCF of $ 6.8 million for the indefinite future. If your estimates were correct, what is the value of the firm's future cash flows at 12% cost of capital?

Answer 1

year	Cash flow	Discounted factor (12%)	discounted cash flow
1	4	0.8929	3.572
2	4.5	0.7972	3.587
3	5	0.7118	3.559
4	5.5	0.6355	3.495
5	6	0.5674	3.404

Formula for present value,

PV = 1 / (1+i)^n

Where,

I = rate of interest

N= number of year

^ = symbol of power

Present value at 12% in year 5

PV = 1 / (1+i)^n

                                                                                   = 1 / 1.7623

                                                                                   = 0.567