What cash flows are forecasted to continue for twenty years

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Your firm's geologists have discovered a small oil field in New York's Westchester County. The field is forecasted to produce its first cash flow exactly one year from today of $3 million. You estimate the beta of a similar investment is 1.25. The expected return on the market is 10%, and the risk-free rate is 2%.

Your job is to determine the present value of the expected cash flows. Your answer, of course, depends on what happens to the cash flows after the first year. Calculate the present value for the following cases:

Problem 1: The cash flows are forecasted to continue forever, with no expected growth or decline?

Problem 2: The cashflows are forecasted to continue for 20 years only, with no expected growth or decline during that period?

Problem 3: The cashflows are forecasted to continue forever, increasing by 2% per year because of inflation?

Problem 4: The cash flows are forecasted to continue for 20 years only, increasing by 2% per year because of inflation?

Reference no: EM132887531

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