In practice, the most common scenario for a new firm is where the firm grows over time but also is subject to the business cycle fluctuations. Let's start with the firm from Lecture 3 (slides 114-15) for which every other year is a recession ($1,000 cash flows) and every other year is an expansion ($2,000 cash flows). However, now the firm is also subject to the 1% growth, so the cash flows are:

CASh FLOWS

Year 1 = $1000 x 1.01 = $1010

Year 2 = $2000 x 1.01^2 = $2040.20

Year 3= $1000 x 1.01^3 = $1030.30

Year 4 = $2000 x 1.01^4 = $2081.21

Year 5 = $1000 x 1.01^5 = $1051.01

Year 6 = $2000 x 1.01^6 = $2123.04

Year 7 = $1000 x 1.01^7 = $1072.14

Year 8 = $2000 x 1.01 ^8= $2165.71

:

:

and so on forever.

The appropriate annual interest rate is 4%. What is the value of the firm now(year 0)?