Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A project has an upfront cost (t-0) of $10,000, and it produces annual FCF of $3,000/year from t-1 through t-7 (seven years). As you can

image text in transcribed
A project has an upfront cost (t-0) of $10,000, and it produces annual FCF of $3,000/year from t-1 through t-7 (seven years). As you can calculate, the net present value of this project, as a stand alone project, without considering inflation, and using a discount rate of 10.0 percent, is $4,605.26. The firm intends to replicate this project out to infinity every seven years, and expects annual inflation to be 4.0 percent for the cash outflows, and 3.0 percent for the cash inflows. That is, the cost in Year 7 of replicating this project will be ($10,000)*(1.04)-$13,159.32, and the expected cash inflow in Year 1 will be ($3,0001 (1.03)1 -$3,090, in Year 2 will be ($3.0001(1.03) $3,182.70, etc. Given this information, and assuming the discount rate remains th determine the net present value of this project if it is infinitely replicated and inflation is taken into consideration. O $8,206 O $11,315 O $9,626 O $13,347 O $15,804 A project has an upfront cost (t-0) of $10,000, and it produces annual FCF of $3,000/year from t-1 through t-7 (seven years). As you can calculate, the net present value of this project, as a stand alone project, without considering inflation, and using a discount rate of 10.0 percent, is $4,605.26. The firm intends to replicate this project out to infinity every seven years, and expects annual inflation to be 4.0 percent for the cash outflows, and 3.0 percent for the cash inflows. That is, the cost in Year 7 of replicating this project will be ($10,000)*(1.04)-$13,159.32, and the expected cash inflow in Year 1 will be ($3,0001 (1.03)1 -$3,090, in Year 2 will be ($3.0001(1.03) $3,182.70, etc. Given this information, and assuming the discount rate remains th determine the net present value of this project if it is infinitely replicated and inflation is taken into consideration. O $8,206 O $11,315 O $9,626 O $13,347 O $15,804

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Case Studies in Finance Managing for Corporate Value Creation

Authors: Robert F. Bruner, Kenneth Eades, Michael Schill

7th edition

007786171X, 77861711, 978-0077861711

More Books

Students also viewed these Finance questions