Office Cleaners Co earns cash flows from contract cleaning. The directors have forecast cash flows of £10,000 per year at today’s prices. The required cost of capital is
Table 12.3
Calculation of present value, discounting at today’s prices
|
Present value |
|
|
|
|
|
|
|
|
|
Year 1 |
|
Year 2 |
|
Year 3 |
|
|
= |
10,000 |
+ |
10,000 |
+ |
10,000 |
|
|
|
(1 + r) |
|
(1 + r)2 |
|
(1 + r)3 |
|
|
|
Year 1 |
|
Year 2 |
|
Year 3 |
|
|
= |
10,000 |
+ |
10,000 |
+ |
10,000 |
|
|
|
(1 + 0.04) |
|
(1 + 0.04)2 |
|
(1 + 0.04)3 |
|
|
|
Year 1 |
|
Year 2 |
|
Year 3 |
|
|
= |
10,000 |
+ |
10,000 |
+ |
10,000 |
|
|
|
(1.040) |
|
(1.0816) |
|
(1.1249) |
|
|
= |
Year 1 |
|
Year 2 |
|
Year 3 |
|
|
|
9,615 |
+ |
9,245 |
+ |
8,890 |
|
|
= |
£27,750 |
|
|
|
|