A firm is considering investing in a new project with an upfront cost of $400 million. The project will generate an incremental free cash flow of $50 million in the first year and this cash flow is expected to grow at an annual rate of 3% forever. If the firm's WACC is 12%, what is the value of this project?
A) $155.6 million
B) $555.6 million
C) $583.3 million
D) $183.3 million

Question

Quizplus · Accepted Answer

A) Value of the project = FCF₀ + FCF₁/(r_wacc - g) = -$400 million + $50 million /(0.12 - 0.03) = $155.6 million

A Firm Is Considering Investing in a New Project with an Upfront