$1-$ You own a gas pipeline that requires no maintenance and will produce $$2$ million of revenue next year. Unfortunately, after the first year the volume of gas $($and thus the revenue$)$ is expected to decline by $4\mathrm{.}0\%$ per year.

$($a$)$ If the discount rate is $11\mathrm{.}0\%$ and the pipeline lasts forever, what is it worth today?

$($b$)$ If the pipeline is to be abandoned at the end of $20$ years, what is it worth today?

$1-$ A widget factory costs $$800,000$ and will produce net cash flow starting next year of $$150,000$ per year for $10$ years after which it will turn to dust. If the discount rate is $12\%,$ what is the NPV$?[$Hint: use the annuity formula. If you want to use the brute$-$force method, maybe do it in Excel instead of by hand.

$2-$ You have been asked to value a new firm, CloudStore, which produces online memory storage devices. After a careful analysis of all available information you estimate that Cloudstore will generate the following cash flows over the next five years $($starting one year from now$)$:

Year CF $($in $mils$)$

$1470$

$2640$

$34,350$

$42,750$

$51,600$

After this you expect the cash flows to grow at $5\%$ for every year after year $5.$ The discount rate for cash flows with comparable risks to Cloudstore is $18\%.$

$($a$)$ What is the present value of the cash flows that are expected from Year $1$ to $4?$

$($b$)$ What is the present value of the cash flows after Year $4($from Year $5$ to infinity$)?$

$($c$)$ What is a fair price at which you are willing to acquire this firm?

$($d$)$ Suppose instead that the cash flow in Year $5$ is $$1,950$ instead of $$1,600$ and then stays at the same level every year after that $($i$.$e$.$ no growth in cash flow$).$ What is the fair value of Cloudstore in this scenario?

$3-$ Buckeye Computer, Inc. produces high performance image generators for simulation

and visual workstations for high$-$end graphics applications. Its financial statements are shown in Exhibit $1.$ You forecast that Buckeye$$s revenue will grow each year by $15\%.$ Estimate FCFs from $2006$ to $2008.$

Use the forecasting ratios provided in Exhibit $2$ to project all the items apart from sales. $($Note that all ratios are measured directly relative to sales.$)$ Assume a tax rate of $35\%.$