Phillips Industries runs a small manufacturing operation. For this fiscal year,
ID: 2772604 • Letter: P
Question
Phillips Industries runs a small manufacturing operation. For this fiscal year, it expects real net cash flows of $190,000. 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))
Phillips Industries runs a small manufacturing operation. For this fiscal year, it expects real net cash flows of $190,000. 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))
Explanation / Answer
Net Cash Flows this year 190,000.00 Discount Rate 11% Decline in cash Flows every year 4% Present Value of Cash Flows = Cash Flows/(Discount rate-Negative Growth rate) Present Value of Cash Flows = 190,000/(11%-(-4%) Present Value of Cash Flows = 190,000/15% Present Value of Cash Flows = 1,266,666.67