At the beginning of 2011, market analysts expect Atlantis Company, holder of a v

Question

At the beginning of 2011, market analysts expect Atlantis Company, holder of a
valuable patent, to earn the following stream of economic profits over the next five
years. At the end of five years, Atlantis will lose its patent protection, and analysts
expect economic profit to be zero after five years.
Year
Expected Economic
Profit
2008 $2,000,000
2009 $3,000,000
2010 $4,000,000
2011 $5,000,000
2012 $2,000,000
a. If investors apply an annual risk-adjusted discount rate of 8 percent, the
value of Atlantis Company in 2011 is $______________________, which is
also the maximum price they would be willing to pay for Atlantis.
b. If investors apply an annual risk-adjusted discount rate of 12 percent, the
value of Atlantis Company in 2011 is $______________________, which is
also the maximum price they would be willing to pay for Atlantis.

Explanation / Answer

You can calculate these using MS Excel, a financial calculator, or (my favorite) a Java Applet. http://www.moneycafe.com/content/articles/21/1/Discounted-Cash-Flows-NPV-Calculator/Page1.html A. 12,635,512.93 B. 11,336,861.01 Alternatively, you can do this by hand using the formula here: http://en.wikipedia.org/wiki/Present_value Calculate the present value for each cash flow and sum.

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