Finding PV of Cash Flows for a an Aging Factory

timer Asked: Oct 12th, 2015

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A company is building a fuel efficient power plant which will generate its first annual cash flow of $18m exactly 4 years from today. As it ages, the volume it produces will remain constant but competing new technologies will drive prices down further. Hence the cash flows it creates will decline by 1% per year. Exactly 45 years from today, this plant will be scrapped, and the Environmental Protection Agency will require $30m expenditures to dismantle and clean it up. The plant’s OCC is 8%. What is the highest price that a buyer should consider paying for it?

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