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Bob owns an investment that is expected to make annual cashflows forever the expected return...

Bob owns an investment that is expected to make annual cash flows forever the expected return for the investment is 9.7%. the next annual cash flow is expected in one year from today and all subsequent cash flows are expected to grow annually by 1.3%. What is the value of the investment if Bob knows that the cash flow in 3 years from today is expected to be $18.000?

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Expert Solution

Value of investment $208821

* Year 2 cash flow = year 3 cash flow / (1 + Growth rate) = 18000/1.013 = $17769

* Year 1 cash flow = year 2 cash flow / (1 + Growth rate) = 17769/1.013 = $17540.97

Terminal cash flow = year 3 cash flow * (1 + growth rate) / (required rate - growth rate) = 18000 * 1.013 / 8.40% = $235071.43

 

jeff jeffy answered 2 years ago
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