Question

. Mae Chen, manager of Chen Fabrics, is comparing two assumptions about the terminal cash flow arising from an expansion project. The Year 7 cash flow is $250,000. One assumption is that subsequent cash flows are constant. An equally valid assumption is that subsequent cash flows will grow at a four percent rate. If Chen Fabrics’ cost of capital is 11 percent, what is the difference in the calculation of the project’s terminal value?

	a.	Under $25,000
	b.	Between $250,000 and $500,000
	c.	Between $500,001 and $1,000,000
	d.	Over 1,000,000

Answer 1