Question
A firm is considering building a widget factory. If built, the firm plans to operate the factory indefinitely (forever). The firm plans to estimate the
A firm is considering building a widget factory. If built, the firm plans to operate the factory indefinitely (forever). The firm plans to estimate the cash flows in the first ten years of the projects life. To account for the cash flows expected to occur after Year 10, the firm plans to estimate a terminal value by assuming that cash flows after Year 10 will grow at a constant rate forever. Which of the following statements is true?
The terminal value is the present value of all cash flows of the project
The WACC should never be used as the discount rate in the terminal value calculation
The terminal value treats the cash flows that occur after Year 10 as a growing perpetuity and discounts those cash flows back to Year 10
none of the above are true
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