Acme Medical Corp. is expecting the cash flows from 2018-2022 in the table below. After 2022 it
Question:
Acme Medical Corp. is expecting the cash flows from 2018-2022 in the table below. After 2022 it is expecting growth in cash flow at an annual rate of 3%. The firm has determined that its weighted average cost of capital (discount rate) is 7%. Using the table below calculate the following:
How do you determine present value based on this information? I was informed the Present Value=$17,245,716.59, but I do not understand how that is calculated.
The present value of Acme's future cash flows using the discounted cash flow model is as follows in bold.For year 6, I used terminal value formula to calculate future cash flow.Terminal Value=FCF*(1+g)/WACC-g
Rate Year Cash flow Present Value @ 7% Present Value @ 7%
7% 2018 $500,000 .93457 $467,289.72
7% 2019 $550,000 .87344 $514,018.69
7% 2020 $620,000 .81630 $579,439.25
7% 2021 $700,000 .76290 $654,205.61
7% 2022 $800,000 .71299 $747,663.55
7% 2023 $20,600,000 .71299 $19,252,336.45
Terminal Value= 800,000*(1+3%)/7%-3%= 20,600,000