You have been asked to assess the value of a finite-life asset with an expected life of 5 years. The asset is assumed to have constant cash-flows over that life (with no "liquidation value" at the end, that is, it will have no value after 5 years). The following table shows the income statement for the asset in question:

You can assume that the firm has no capital expenditures, depreciation or working capital needs; in other words, earnings are cash flows. The effective tax rate is also the marginal tax rate. The cost of capital for the asset is 10%

Estimate the value of the asset

How would your answer to 1) change if you were told that the cash flows were real cash flows and that the cost of capital (of 10%) was a nominal cost of capital. The expected inflation rate is 2%.

Revenues Operating Expenses EBIT - Interest expenses Taxable income - Taxes Net Income Yrs 1-5 $1.000 $600 $400 $100 $300 $105 $195

Question

You have been asked to assess the value of a finite-life asset with an expected life of 5 years. The asset is assumed to have constant cash-flows over that life (with no "liquidation value" at the end, that is, it will have no value after 5 years). The following table shows the income statement for the asset in question:

You can assume that the firm has no capital expenditures, depreciation or working capital needs; in other words, earnings are cash flows. The effective tax rate is also the marginal tax rate. The cost of capital for the asset is 10%

Estimate the value of the asset
How would your answer to 1) change if you were told that the cash flows were real cash flows and that the cost of capital (of 10%) was a nominal cost of capital. The expected inflation rate is 2%.

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Revenues Operating Expenses EBIT - Interest expenses Taxable income - Taxes Net Income Yrs 1-5 $1.000 $600 $400 $100 $300 $105 $195