Due to competition from a new plastic, revenues for the mainstay product of Toys-R-Plastic are declining...
Due to competition from a new plastic, revenues for the mainstay product of Toys-R-Plastic are declining at 5% per year. Revenues will be $2M for this year. The product will be discontinued at the end of year 6. If the firm’s interest rate is 10%, cal- culate the PW of the revenue stream.
Homework Answers
Use geometric gradient with g = -5%, i = 10% and n = 6. Annual revenue is $2 million.
P = A{1 - (1+g)^n(1+i)^-n / i - g}
= 20,00,000{1 - (0.95^6) * (1.10^-6) / 0.10 + 0.05
= 20,00,000{1 - (0.7351) * (0.5645) / 0.15
= 20,00,000 {0.5850 / 0.15}
= 20,00,000 * 3.9
= 7.8 million.
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