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. Lets start with the firm from Lecture 3 (slides 22-23) 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: Year Cash flow Year 1 $1,0001.01=$1,010 Year 2 $2,0001.012=$2040.20 Year 3 $1,000 1.013=$1030.30 Year 4 $2,000 1.014=$2081.21 Year 5 $1,000 1.015=$1051.01 Year 6 $2,000 1.016=$2123.04 Year 7 $1,000 1.017=$1072.14 Year 8 $2,000 1.018=$2165.71 . . . . . . and so on forever. The appropriate annual interest rate is 4%. What is the value of the firm now 1 (year 0)? Hint: Try to decompose the cash flows into two parts you can price as on slide 23 of Lecture 3.