Reference no: EM13879363
These are the forecasts of revenues over the lifetime of a project. Assume all cash flows occur at the end of the year.
Yearly expenses from year 1 to year 3: $30 Million
Yearly revenues from year 1 to year 3: $0
Yearly expenses from year 4 to year 10: $55 Million
Yearly expected revenues from year 4 to year 10: $105 Million
The discount rate for the firm is 7.8% for all cash flows (net cash flows from projects, recovered NWC, salvage, etc.).
In the first part of this question, you are asked to only calculate the present value of the discounted costs and revenues. What is this value?
Hint: This hint is optional; you don't have to read this. This is only to help you, if you are confused by this hint just ignore it and solve the question as you would. This will have two parts. Part 1 would be discounted value of costs for the first 3 years of $30 Million each, which is an annuity. You know the formula for an annuity for (negative) cash flows that will come the next 3 years.
Part 2 is an annuity of $50 Million a year for 7 years, the first cash flow which will occur at the end of the 4th year, and the last one which will occur at the end of the 10th year. Now position yourself at the end of year 3. You should be able to use the annuity formula for the 7 cash flows which will occur from the end of year 4 to the end of year 10. However, you will have the value at the end of year 3 by using the annuity formula. You will have to use discounting again to find the present value, that is today.
Once you have calculated the above, answer would be Part 1- Part 2= Discounted Net Cash Flows from year 4 to year 10- discounted costs from year 1 to year 3.
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