You are an analyst working for Goldman Sachs, and you are trying to value the growth potential of a large, established company, Big Industries. Big Industries has a thriving R&D division that has consistently turned out successful products. You estimate that, on average, the division launches two projects every three years, so you estimate that there is a 61% chance that a project will be produced every year. Typically, the investment opportunities the R&D division produces require an initial investment of $10.4 million and yield profits of $1.06 million per year that grow at one of three possible growth rates in perpetuity:
2.5%, 0.0%, and -2.5%. All three growth rates are equally likely for any given project. These opportunities are always “take it or leave it” opportunities: If they are not undertaken immediately, they disappear forever. Assume that the cost of capital will always remain at 11.6% per year.
What is the present value of all future growth opportunities Big Industries will produce? (Hint: Make sure to round all intermediate calculations to at least four decimal places.)
What is the present value of all future growth opportunities? The present value is $1 million. (Round to three decimal places.)Get Finance homework help today
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