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

question 11

Multiple Choice

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

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Definitions:

Realization

The process of converting non-cash assets into cash or recognizing revenue when goods or services are delivered, generating measurable income.

Noncash Resources

Assets or resources that do not have a direct cash value or cannot be easily converted to cash, such as goodwill, patents, and trademarks.

Revenues Earned

Represents the total amount of income generated from sales of goods or services before any deductions.

Percentage-Of-Completion

An accounting method used to recognize revenue and expenses of long-term contracts proportionally over the life of the contract based on the degree of completion.