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A firm is considering investing in a new project with an upfront cost of $400 million. The project will generate an incremental free cash flow of $50 million in the first year and this cash flow is expected to grow at an annual rate of 3% forever. If the firm's WACC is 12%, what is the value of this project

Answer :

Answer:

$156 million

Explanation:

The computation of the value of the project is shown below:

Value of the Project = Present Value of Incremental cash Inflows - Upfront Cost

where,

Present Value of Incremental cash Inflows equals to

= (Incremental Cash inflows) ÷ (Discount rate - Growth rate)

= ($50 million) ÷ (12% - 3%)

= ($50 million) ÷ (9%)

= $556 million

Now the value of the project is

= $556 million - $400 million

= $156 million

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