Marin Inc. owns 25% of the common shares of Riverbed Corp. The other 75% of the shares are owned by the Riverbed family. Marin acquired the shares eight years ago through a financing transaction. Each year, Marin has received a dividend from Riverbed. Riverbed has been in business for 60 years and continues to have strong operations and cash flows. Marin must determine the fair value of this investment at its year end. Since there is no market on which the shares are traded, Marin must use a discounted cash flow model to determine fair value. Marin management intends to hold the shares for 5 more years, at which time they will sell the shares to the Riverbed family under an existing agreement for $1 million. There is no uncertainty in this amount. Management expects to receive dividends of $89,500 for each of the five years, although there is a 20% chance that dividends could be $41,000 each year. The risk-free rate is 5% and the risk-adjusted rate is 7%.

Calculate the fair value of the investment in Riverbed using the traditional approach. (For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round answers to 0 decimal places, e.g. 5,275.)

Fair value of the investment

$enter the Fair value of the investment in dollars

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Calculate the fair value of the investment using the expected cash flow approach. (For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round answers to 0 decimal places, e.g. 5,275.)

Calculate the fair value of the investment using the expected cash flow approach:

In this case, which discounted cash flow model is the best?