Phillips Industries runs a small manufacturing operation. For this fiscal year,
ID: 2756646 • Letter: P
Question
Phillips Industries runs a small manufacturing operation. For this fiscal year, it expects real net cash flows of $201,000. Phillips is an ongoing operation, but it expects competitive pressures to erode its real net cash flows at 4 percent per year in perpetuity. The appropriate real discount rate for Phillips is 11 percent. All net cash flows are received at year-end. What is the present value of the net cash flows from Phillips’s operations? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))
Present value $
Explanation / Answer
Present value = net cash flows (1 + growth) / capitalised rate
= $201000 (1+0.04) / .11
= $ 1900363.64