Question

The net cash flows of Advantage Leasing for the next 3 years are $42,000, $49,000 and $64,000 respectively, after which the growth rate will be a constant 2% with a WACC of 8%. What is the present value of the terminal value

Answer 1

Answer:

The present value of terminal value is $ 863,689.48  

Explanation:

Terminal value=Cash flows at third year*(1+g)/WACC-g

cash flows at the third year is $64,000

g is the growth rate of net cash flows which is 2% in perpetuity

WACC is 8%

Terminal value=$64,000*(1+2%)/(8%-2%)

                       =$64000*1.02/0.06

                       =$ 1,088,000.00  

The present value of terminal=terminal value*discount factor in year 3

discount factor in year=1/(1+8%)^3=0.793832241

Present value of terminal cash flow=1,088,000.00 *0.79383224

                                                           =$ 863,689.48  

Answer 2

Answer:

​$863​,​689.48

Explanation:

Terminal value means the value of an asset at future date.. The terminal value is the last value after the third year.. The formula goes thus

Terminal Value=( Last cash flow X 1 + Growth rate) / (Required return - growth return)

TV= [640000 X (1+2%) ] / [8% - 2 %]

TV= 64000 X 1.02 / 0.08-0.02

TV=65280 / 0.06

TV=$1,088,000

Terminal value is $1,088,000

To get the present value of Terminal value

Pv= Terminal value (1+i)^n

Pv= 1,088,000(1+0.08)^3

Pv= 1,088,000(1.08)^3

Pv=1,088,000(1.259712)

Pv=863​,​689.48

Therefore, the present value of the terminal value is $863​,​689.48