Problem 1

Consider the following data:

Free Cash Flow 1 = $27 million;

Free Cash Flow 2 = $43 million;

Free Cash Flow 3 = $48 million.

Free Cash Flow 4= $62 million.

Assume that free cash flow grows at a rate of 6 percent for year 5 and beyond. If the weighted average cost of capital is 12 percent, calculate the value of the firm.

Problem 2

An Electronics shop provides specialty-manufacturing service. The initial outlay is $30 million and, management estimates that the firm might generate cash flows for years one through five equal to $5,000,000; $7,500,000; $10,500,000; $20,000,000; and $20,000,000.

The company uses a 20% discount rate for projects of this type.

Is this a good investment opportunity? Explain your answer