Answer:
The question revolves around calculating future cash flows and understanding the present value of future amounts. It employs fundamental finance concepts such as free cash flow growth and discounting future values at a given interest rate to compare the value of money over time.
Step-by-step explanation:
The scenario provided looks at a potential investment by a company and asks to calculate the future free cash flows based on a growth rate. This involves understanding the concept of free cash flow growth and how to calculate future values of money, which is a fundamental aspect of corporate finance and investment decision-making. Additionally, present value calculations play an essential role, as they help to determine the value of future cash flows in today's dollars, given a certain interest rate.
To answer the question, you would find the future value for the cash flow by applying the growth rate formula: Future value = Present value × (1 + Growth rate)Number of years. If the free cash flow is starting at $1,500,000 and expected to grow at 3% annually, then after one year, the calculated future cash flow would be: $1,500,000 × (1 + 0.03)1 = $1,545,000.
The other parts of the question involving present value computations demonstrate how to discount future cash flows back to their present value at a given interest rate, showing their worth in today's dollars and making comparisons to investments today versus in the future. For example, $20 million received in one year is discounted back at a 15% interest rate, resulting in a present value of $20 million / (1 + 0.15)1 = $17.4 million. These concepts are crucial for determining whether or not an investment is financially viable.