Final answer:
To calculate the value of the firm, use the discounted cash flow (DCF) method. The value of the firm is $102 million. The investment amount at an effective rate of return of 4% is $183 million.
Step-by-step explanation:
To calculate the value of the firm, we need to calculate the present value of the free cash flows. To do this, we will use the discounted cash flow (DCF) method. The DCF formula is: PV = CF / (1 + r)^n, where PV is the present value, CF is the cash flow, r is the discount rate, and n is the time period. For years 1-4, we will use the cash flows as given. For year 5 and beyond, we will use the growth rate of 6% and the weighted average cost of capital (WACC) of 12% to calculate the cash flows. After calculating the present values for each cash flow, we sum them up to get the value of the firm. Taking the present values of the cash flows given and the growth rate and discount rate, the value of the firm is $102 million.
b. To calculate the investment amount at an effective rate of return of 4%, we will use the formula: Investment = CF / (r - g), where CF is the cash flow, r is the discount rate, and g is the growth rate. Using the given values, the investment amount would be $183 million.