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meriva
2 years ago
9

You are running a hot Internet company. Analysts predict that its earnings will grow at 30% per year for the next five years. Af

ter that, as competition increases, earnings growth is expected to slow to 2% per year and continue at that level forever. Your company has just announced earnings of $1,000,000. What is the present value of all future earnings if the interest rate is 8%
Business
1 answer:
Andrej [43]2 years ago
8 0

Answer:

The present value of the future earnings is $51,981,214.36

Explanation:

The present value of the earning can be calculated by discounting the earnings for the next five years along with calculating the terminal value of earnings at the end of the five years when the growth rate in earnings becomes constant and discounting it back to the present value.

Taking the value in millions,

Present Value = 1 * (1+0.3) / (1+0.08)  +  1 * (1+0.3)^2 / (1+0.08)^2  +  

1 * (1+0.3)^3 / (1+0.08)^3  +  1 * (1+0.3)^4 / (1+0.08)^4  +  1 * (1+0.3)^5 / (1+0.08)^5  + [( 1 * (1+0.3)^5 * (1+0.02) / (0.08 - 0.02)) / (1+0.08)^5]

Present value = $51.98121436 million or $51,981,214.36

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Answer:

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Differential Analysis dated April 30:

                                                 Make                  Buy      

                                            Alternative 1    Alternative 2    Difference

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Direct labor                                            12.00

Factory overhead

Fixed overhead                                       1.80

Variable overhead                                 3.00

Total cost per unit                             $24.80

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