What is the value of the investment if WMW knows that the cash flow in 3 years from today is expected to be $18,000?

WMW 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 1 year from today and all subsequent cash flows are expected to grow annually by 1.3%. What is the value of the investment if WMW knows that the cash flow in 3 years from today is expected to be $18,000?

A. $219,893

B. $206,141

C. $214,286

D. $208,821

E. none are within $100 of the correct answer

Expert Solution

Value of investment $208821 Option D

* 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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