Your firm has a project with Free Cash Flows (FCF) listed in the table below. Th

Question

Your firm has a project with Free Cash Flows (FCF) listed in the table below. The year 5 FCF consists of $25 million for year 5 and $75 million that represents the present value in year 5 of FCFs in years 6 through 10. After year 10, competition will drive incremental FCF to 0. Your discount rate is 10%. Based on this information, answer questions 22-25.
Time 0 1 2 3 4 5
FCF ($MM) -50 5 10 15 20 100

Assuming the cash flows change through year 10, how far off could your discount rate be before your firm would lose incentive to invest?

a. 12% b. 16% c. 20% d. 24%

Explanation / Answer

so according to the question ,

Present value of all cash flows given need to be calculated wirh r=0.1

PV= 5/1.1 + 10/1.1^2 + 15/1.1^3   + 20/1.1^4 + 100/1.1^5   - 50

   =49.93 million = 50 million

after 10 years discount changes to r and your firm would lose incentive to invest so you so r is 20%

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