When estimating g, we may consider a firms opportunities to invest in new projects with positive NPVs.

Consider the example. If EPS1 = 10 and Dividend = 10, plowback = 0 and so g = 0. Since r = 0.1, P0 = Dividend/r = 100.

A) If the firm can invest $2 at t = 1 on a new project.

B) If the firm can invest $2 at t = 1 on a new project. The project generates returns 20% per year forever.

The project generates returns 10% per year forever. So for both cases, P and PVGO = ?