Question

Your firm has been working on an advanced technology. This technology will be available in the near term. The firm anticipates the first annual cash flow from the technology to be $107310, received three years from today. Subsequent annual cash flows will grow at 2.68% in perpetuity.

What is the present value of the technology if the discount rate is 11.12%? (Round answer to 2 decimal places. Do not round intermediate calculations).

Answer 1

Present value of advanced technology

As advanced technology expecting for first three years explicit cash flows and after that constant growing cash flow at 2.68% in perpetuity.

Thus,

PV of advanced technology = PV of explicit cash inflows + PV of terminal value of constant growing cash inflows in perpetuity.

$PV = Cash Inflow \sum_{n=1}^{n} \frac{1}{(1+r)^{n}} + \frac{Terminal Value}{(1+r)^{n}}$

where,

n= period of explicit cash inflows

r = discount rate

$Terminal Value = \frac{last cash flow(1+g)}{(r-g)}$

where,

g= growth rate.

Please refer to below spread sheet for calculation and answer.

Formula reference -

Thus, Present value of Advanced technology is $ 983,867.19