A retail coffee company is planning to open 90 new coffee ou

A retail coffee company is planning to open 90 new coffee outlets that are expected to generate $14.8 million in free cash flows per year, with a growth rate of 3.1% ?n perpetuity. If the coffee company\'s WACC is 10.4%, what is the NPV of this expansion? The present value of the free cash flows is $ million. (Round to two decimal places.)

Solution

The question requires to calculate the present value of growing perpetuity. The formula to calculate the same is as under, Present value of growing perpetuity = [D(1+g)]/ [r-g] D = Free cash flow = $14.8 million g = growth rate = 3.1% r = rate of interest i.e.WACC = 10.4% Present value of growing perpetuity = [14.5(1+0.031)]/ [0.104-0.031] Present value of growing perpetuity = 14.9495/ 0.073 Present value of growing perpetuity = 204.79 The present value of the free cash flows is $204.79 million.