Question

A new restaurant expects to generate a $700,000 cash flow in its first year of operation, $1,000,000 in its second, and $1,500,000 million in its third. The cash flows are expected to grow thereafter at a rate of 3.00% per year. The appropriate discount rate is 9.00% per year. Calculate the present value of future cash flows.

Round your answer to the nearest whole dollar. For example, $2,371.24 should be entered as 2,371.

Answer 1

$22,525,881

Step-by-step explanation:

Value after year 3 = (Cash flow for year 3 * Growth rate)/(Discount rate -Growth rate)

Value after year 3 = ($1,500,000*1.03) / (0.09-0.03)

Value after year 3 = $1,545,000 / 0.06

Value after year 3 = $25,750,000

Present value of future cash flows = Cash inflow * Present value of discounting factor(rate%,time period)

PV = $700,000/1.09 + 1,000,000/1.09^2 + 1,500,000/1.09^3 + 25,750,000/1.09^3

PV = 642201.84 + 841679.99 + 1158275.22 + 19883724.62

PV = $22,525,881.67