Phillips Industries runs a small manufacturing operation. For this fiscal year,
ID: 2628106 • Letter: P
Question
Phillips Industries runs a small manufacturing operation. For this fiscal year, it expects real net cash flows of $209,000. Phillips is an ongoing operation, but it expects competitive pressures to erode its real net cash flows at 5 percent per year in perpetuity. The appropriate real discount rate for Phillips is 13 percent. All net cash flows are received at year-end. What is the present value of the net cash flows from Phillips
Phillips Industries runs a small manufacturing operation. For this fiscal year, it expects real net cash flows of $209,000. Phillips is an ongoing operation, but it expects competitive pressures to erode its real net cash flows at 5 percent per year in perpetuity. The appropriate real discount rate for Phillips is 13 percent. All net cash flows are received at year-end. What is the present value of the net cash flows from Phillips
Explanation / Answer
two equations
first one perpetuity formula
second, the decline in value of the perpetuity or a growing perpetuity
A/r for the first part
120K*.06/(.11-.06)
for the second part. Find the difference