You are trying to value the following project for your company.You know that the project...

You are trying to value the following project for your company. You know that the project will generate free cash flows in perpetuity that will grow at a constant annual rate of 2% after year 2. The applicable interest rate for this project is 10%. What is the NPV of this project? Express your result in $-millions (do not include the $-symbol in your answer). If you calculate a negative NPV enter a negative number.

**Free Cash Flow Forecasts (in $-millions)**
	Year
	0	1	2
Free Cash Flows	-3	14	21

Expert Solution

The NPV is computed as follows:

= Year 0 cash flow + Year 1 cash flow / (1 + Interest rate) + Year 2 cash flow / (1 + interest rate)² + 1 / (1 + interest rate)² x [ (Free cash flow in year 2 x (1 + growth rate) / (Interest rate - growth rate) ]

= - $ 3 million + $ 14 million / 1.10 + $ 21 million / 1.10² + 1 / 1.10² x [ ($ 21 million x 1.02) / (0.10 - 0.02) ]

= - $ 3 million + $ 14 million / 1.10 + $ 21 million / 1.10² + $ 267.75 million / 1.10²

= - $ 3 million + $ 14 million / 1.10 + $ 288.75 million / 1.10²

= $ 248.36 million Approximately

jeff jeffy answered 2 years ago

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