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A project is expected to produce a cash flow of $7800 next year. This is expected...

A project is expected to produce a cash flow of $7800 next year. This is expected to grow at a rate of 17% for the following four years before slowing down to an estimated eternal growth rate of 5% a year. If you require a 12% return on this project, what is the maximum amount you should be willing to invest in it? Round your answer to the nearest dollar.

A. $150429

B. $177382

C. $162478

D. $219245

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Answer #1

First we find the annual CF for 6 years as

Year Cash flows
1 7800
2 9126
3 10677.42
4 12492.581
5 14616.32
6 15347.136

horizon value as CF6/(k-g)

= 15347.14/ (12%-5%)

=219244.86

Present value = PV of cash flows + PV of horizon value

= 7800/1.12^1 + 9126/1.12^2 + 10677.42/1.12^3 + 12492.58/1.12^4 + 14616.32/1.12^5 + 219244.86/1.12^5

=162477.83

Correct option is C: 162478

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