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Phillips Industries runs a small manufacturing operation
Phillips Industries runs a small manufacturing operation. For this fiscal year, it expects real cash flows of $195,000. The company is an ongoing operation, but it expects competitive pressures to erode its real cash flows at 5 percent per year in perpetuity. The appropriate real discount rate for the company is 14 percent. All cash flows are received at year-end. What is the present value of the cash flows from the company's operations? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Present value of cash flows
Expert Solution
Cash flow for year 1 = $195000
Discount rate = 14%
Growth rate = - 5%
So, present value of the cash flows for perpetuity
Present value = cash flow for year 1/[(discount rate - growth rate)]
Therefore,
Present value = $195000/[0.14 - (-0.05)]
Present value = $195000/0.19
Present value = $1026316
So the present value of the cash flows from the company's operations = $1026316
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