Could someone pls explain how to figure this out using excel? I believe the function i need to use is '=npv()'..

Your firm is interested in acquiring a small subsidiary which has products that will bring in fairly stable cash flows in the future. Your staff has estimated that the net cash inflows for this potential subsidiary will be as follows:

Year Net Cash Inflow
1 $300,000
2 190,000
3 110,000
4 to 'infinity" 145,000

What is the present value of these expected net cash inflows if your firm's discount rate in 10 percent?


Thanks all.

3/14/2010 6:52:51 PM

Is this all the info you're given? No cash outflows in this problem? What a non-realistic example


Ok I'll take a shot at this but don't accept it as truth if you feel like it's not correct.


Most of the time, a cash flow that goes from x period to infinity, it is referred to as a perpetuity. What you are essentially asked to do is guesstimate how much cash this project is worth in present terms. Estimating to infinity sounds like a bit of a problem. Another issue is the fact that the further into the future you are trying to discount a cash flow, the more inaccurate your estimate will be. Using the concept of time value of money, everyone will agree that a $1 today will grow to more than a $1 in x years. Using this concept you realize that if you have a payment of 145,000 in year 4, then in an infinite amount of years that 145k will be a huggggggggeeee number. You can't really discount forward into an amount of periods that you have no clue over. However, using this same theory, you can reason that even $0.000000000000000001 x 10^-999999 will also still yield some higher value in the future. This means that after a certain amount of periods, the cash flow becomes irrelevant in calculating present value. I mean $145,000 hundreds of years from now probably would discount to a present value close to 0. I will skip ahead of finding the following equation and reason that since discounting that far into the future is neither accurate nor sensible, the equation used for perpetuities is PV = Cash Flow/(Discount rate - Growth Rate in Cash Flow) OR PV = C/(i-g)

For this problem you have no growth rate (g) in the cash flow. Therefore you can find the present value of this project by doing the NPV of the first three years and adding the PV formula of a perpetuity to this number.

In excel the formula should read:

=NPV(rate,C1,C2,C3) + (C4/rate)

Let me know what you get.

[Edited on March 15, 2010 at 10:32 AM. Reason : What class is this for?]

3/15/2010 10:31:58 AM

Thanks fdhelmin!

Very much appreciated.

3/15/2010 2:03:57 PM