A new firm announces that it will invest $150 million in projects each year forever. All projects are expected to generate a 15 percent rate of return on its beginning-of-period book value each year for five years. The required return for this type of project is 12 percent; the firm depreciates the cost of assets straight-line over the life of the investment.

Required:

What is the value of the firm under this investment strategy? Would you refer to this valuation as a Case 1, 2, or 3 valuation?

What is the value added to the initial investment of $150 million?

Why is the value added greater than 15 percent of the initial $150 million investment?