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? a) $44 b)$57 c)$9 d)$128

Answer 1

The value of the 5 year projection period (and not the entire stream of cash flows that would also include the perpetual cash flows) will be equal to the sum of the present values of the uneven un-levered cash flows discounted at 14 %

Present Value of Uneven Cash Flows = P1 = 10 / (1.14) + 12.5 / (1.14)^(2) + 13.5 / (1.14)^(3) + 14 / (1.14)^(4) + 15 / (1.14)^(5) = $ 43.58 million ~ $ 44 million

Hence, the correct option is (a)