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These are the forecasts of revenues over the lifetime of a project. Assume all cash flows occur at the end of the year.
Yearly expenses from year 1 to year 3: $30 million
Yearly revenues from year 1 to year 3: $0
Yearly expenses from year 4 to year 10: $55 million
Yearly expected revenues from year 4 to year 10: $105 million
The discount rate for the firm is 8.2% for all cash flows (net cash flows from projects, recovered NWC, salvage etc.).
In the first part of the question, you are asked to only calculate the present value of the discounted costs and revenues. What is this value?
Hint: This hint is optional; you don’t have to read this. This is only to help you, if you are confused by this hint, just ignore it and solve the question as you would. This will have two parts. Part 1 would be the discounted value of costs for the first 3 years of 30M each, which is an annuity. You know the formula for an annuity for (negative) cash flows that will come the next 3 years.
Part 2 is an annuity of $50 M a year for 7 years, the first cash flow which will occur at the end of the f4th year, and the last one will occur at the end of the 10th year. Now position yourself at the end of year 3. You should be able to use the annuity formula for the 7 cash flows which will occur from the end of year 4 to the end of year 10. However, you will have the value at the end of year by using the annuity formula. You will have to use discounting again to find the present value, that is today.
Once you have calculated the above, your answer would be Part 1-Part 2= Discounted Net Cash Flows from year 4 to year 10- Discounted Costs from year 1 to year 3.
Give your answer in millions, that is if the answer is $15,360,000 then you should answer 15.36 etc.
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