Question

Phillips industries runs a small manufacturing operation. for this fiscal year, it expects real net cash flows of $197,000. the company is an ongoing operation, but it expects competitive pressures to erode its real net cash flows at 6 percent per year in perpetuity. the appropriate real discount rate for the company is 11 percent. all net cash flows are received at year-end. what is the present value of the net cash flows from the company's operations?

Answer 1

Answer: Present value of the cash flows of the company is $1,158,824.

Explanation: Philips industries have the cash flow for $197,000. The industry needs to find the present value of the cash flow and the cash flows growth is decreasing every year by 6%.

The present value of the cash flows for perpetuity with decreasing growth rate is:

$Present value = Cash flow for year 1 (C1) / (discount rate - growth)$

where, Cash flow for the year 1 (C1) = $197,000

Discount rate (r) = 11%

Growth rate (g) = -6%

$Present value of the cash flows (PV) = 197000/[0.11 - (-0.060)]$

$Present value of the cash flows (PV) = 197000/0.17$

Present value of the cash flows (PV) = $1,158,824

Therefore the present value of the cash flows of the company is $1,158,824.