Rocky Mountain Drilling Inc.has a new shale oil field under development.The firm estimates free cash flows to the firm (FCFF)of $2,000,000 at the end of one year and increases of 20% per year for each of the next two years,and then year-end fcff of $3,000,000 per year for five years before exhausting the oil in the field.If the firm has a WACC of 12.5%,what is the value today of these expected cash flows?

Question

Quizplus · Accepted Answer

The value today of the expected cash flows is calculated by discounting each of the future cash flows back to the present value using the WACC of 12.5%. The calculation involves finding the present value of the increasing cash flows for the first three years and the constant cash flows for the next five years.