Question

JB Co. is planning to invest in a new koala theme park. The investment will generate $4.5 million p.a. for 15 years with the first cash inflow received in one year's time. The required rate of return for this type of investment is expected to be 6% p.a. for years 1-9 rising to 11% p.a. for years 10-15. What is the most JB Co. should pay for this investment now?

Answer 1

Value of Investment = PV of CFs from it.

Year	CF	PVF	PV of CFs	PVF Cal
1	$ 4,500,000.00	0.9434	$    4,245,283.02	1/1.06
2	$ 4,500,000.00	0.8900	$    4,004,983.98	1/(1.06^2)
3	$ 4,500,000.00	0.8396	$    3,778,286.77	1/(1.06^3)
4	$ 4,500,000.00	0.7921	$    3,564,421.48	1/(1.06^4)
5	$ 4,500,000.00	0.7473	$    3,362,661.78	1/(1.06^5)
6	$ 4,500,000.00	0.7050	$    3,172,322.43	1/(1.06^6)
7	$ 4,500,000.00	0.6651	$    2,992,757.01	1/(1.06^7)
8	$ 4,500,000.00	0.6274	$    2,823,355.67	1/(1.06^8)
9	$ 4,500,000.00	0.5919	$    2,663,543.09	1/(1.06^9)
10	$ 4,500,000.00	0.5332	$    2,399,588.37	1/[(1.06^9)(1.11)]
11	$ 4,500,000.00	0.4804	$    2,161,791.32	1/[(1.06^9)(1.11^2)]
12	$ 4,500,000.00	0.4328	$    1,947,559.75	1/[(1.06^9)(1.11^3)]
13	$ 4,500,000.00	0.3899	$    1,754,558.33	1/[(1.06^9)(1.11^4)]
14	$ 4,500,000.00	0.3513	$    1,580,683.18	1/[(1.06^9)(1.11^5)]
15	$ 4,500,000.00	0.3165	$    1,424,038.90	1/[(1.06^9)(1.11^6)]
PV of CFs			$ 41,875,835.09

Value of Investment today is $ 41,875,835.09