Question

you are the analyst of a large company. you are presented with the following data for xyz company..( in millions of dollars)
year.       cash flow

2010    1600
2011     2600
2012      3200
2013      3400
2014       2300
a)calculate the geometric total return b) the annualized rate of change c) make a 10 year forecast based on the annualized rate of growth in the cash flow and lastly calculate the NPV of the forecast cash flow assuming an immediate investment of 19.8billion. show the steps
if you are to skip a question skip question a)

Answer 1

b)

The annualized rate of change is calculated as below

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c)

To make a linear 10 year forecast, we can make use of the linear forecasting equation.

y = a + bx

where a = intercept and b = slope

To obtian the estimates of intercept and slope, we can use the regression function in excel. In excel go to data, data analysis and choose regression.

Using the regression data, the forecasting equation is

y = 1960 + 220 X

The above equation is used to make the 10 year forecast.

Cash flow in year 1 = 1960 + 220 1 = 2180

Cash flow in year 2 = 1960 + 220 2 = 2400

Cash flow in year 3 = 1960 + 220 3 = 2620

Cash flow in year 4 = 1960 + 220 4 = 2840

Cash flow in year 5 =  1960 + 220 5 = 3060

Cash flow in year 6 = 1960 + 220 6 = 3280

Cash flow in year 7 = 1960 + 220 7 = 3500

Cash flow in year 8 =  1960 + 220 8 = 3720

Cash flow in year 9 =  1960 + 220 9 = 3940

Cash flow in year 10 =  1960 + 220 10 = 4160

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Period	Year	Cash flows	Return(%)
1	2010	1600	0%
2	2011	2600	62.5
3	2012	3200	23.08
4	2013	3400	6.25
5	2014	2300	-32.35

Geometric total return = 7.53%

The table below shows the forecasted cash flows.

The net present value is calculated using the geometric total return as the discount rate.

NPV of the forecasted cash flows = $ 1.03 billion.