Your consulting firm will produce cash flows of $100,000 this year, and you expect cash flow to keep pace with any increase in the general level of prices. The interest rate currently is 6%, and you anticipate inflation of about 2%. a. What is the present value of your firm's cash flows for years 1 through 5? b. How would your answer to (a) change if you anticipated no growth in cash flow?

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Business

Bond

7 September, 01:18

Your consulting firm will produce cash flows of $100,000 this year, and you expect cash flow to keep pace with any increase in the general level of prices. The interest rate currently is 6%, and you anticipate inflation of about 2%. a. What is the present value of your firm's cash flows for years 1 through 5? b. How would your answer to (a) change if you anticipated no growth in cash flow?

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Ezekiel Bradshaw · Answer 1

cash flow will increase according to inflation. We shall discount them at 6% for 5 years

NPV = 100000 + 100000x1.02 / 1.06 + 100000 x1.02² / 1.06² + 100000 x (1.02) ³/1.06³ + 100000x 1.02⁴ / 1.06⁴

= 100000+96226.41 + 92595.23+89101.07+85738.76

= 463661.5