Your company is looking at introducing a new product into its product line. Your company expects that this new product would be offered into perpetuity. It is expected to decrease the firm's FCF8 immediately by $36 million and $22 million next year. Starting in year 2, the firm's FCF8 will increase by $10 million. These incremental FCF8 will then decrease at a rate of 2% into perpetuity (i.e. year 3's incremental FCF will be 10M*(1+(-0.02)) = 9.8M, and so on). If the firm's discount rate is 12%, is this a good investment? 2.

Question

I am struggling with this problem as well and how to approach setting it up in excel. I'm using the Pearson Corporate Finance book 4th edition stand alone by Berk.

Your company is looking at introducing a new product into its product line. Your
company expects that this new product would be offered into perpetuity. It is expected to
decrease the firm's FCF8 immediately by $36 million and $22 million next year. Starting
in year 2, the firm's FCF8 will increase by $10 million. These incremental FCF8 will
then decrease at a rate of 2% into perpetuity (i.e. year 3's incremental FCF will be
10M*(1+(-0.02)) = 9.8M, and so on). If the firm's discount rate is 12%, is this a good
investment?
2.

Image Transcription

Your company is looking at introducing a new product into its product line. Your company expects that this new product would be offered into perpetuity. It is expected to decrease the firm's FCF8 immediately by $36 million and $22 million next year. Starting in year 2, the firm's FCF8 will increase by $10 million. These incremental FCF8 will then decrease at a rate of 2% into perpetuity (i.e. year 3's incremental FCF will be 10M*(1+(-0.02)) = 9.8M, and so on). If the firm's discount rate is 12%, is this a good investment? 2.

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