Question

A company has unlevered cash flow in years 1-5: $10, $12.5, $13.5, $14.0, $15.0. What is the value of the 5 year projection period assuming a 14.0% discount rate and a 2% perpetuity rate?

Answer 1

We need to calculate the terminal value of the cash flows after year 5.

The terminal value can be given as:

Terminal Value=CF1/(r-g) where CF1 is the next year cash flow
r is the required return and g is the growth rate

Terminal value =15*(1+0.02)/(0.14-0.02)
=$127.50

Hence year 5 cash flows shall have added terminal value also

Year 5 cash flow=$15+$127.50=$142.50

Year	Cash flows	DF	PV
1	$    10.00	0.877193	$       8.77
2	$    12.50	0.769468	$       9.62
3	$    13.50	0.674972	$       9.11
4	$    14.00	0.59208	$       8.29
5	$ 142.50	0.519369	$    74.01
		Total	$ 109.80

DF is the discount factor =1/(1+r)^n

r=0.14

n is the year

Value =$109.80