Question

Asked Oct 26, 2019

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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.

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Step 1

Initial Investment of New Product = Decrease in Firm’s FCFs of Current Year = $36 Million

Cash Flow of Year 1 = Decrease in Firm’s FCFs of Year 1 = $22 Million

Cash Flow of Year 2 = $80 Million

Discounting Rate = 12%

Calculation of Present Value of FCFs using excel:

Step 2

The result of above table is as follows:

Step 3

**Working Notes:**

** **

**Terminal Value**

Incremental FCFs of Year 3 and so on = $10 Million × (1 + (-0.02)) = 9.8 M

Perpetual Growth Rate of FCFs = -2%

Discounting Rate or Weight...

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