A soap company is considering an investment of $5 million to introduce a new brand. The project will generate a cash flow of $1.2 million at year 1. The OCC is 12%.
a. Positive cash flows are expected to continue in perpetuity, but they will decline at a rate of 8% per year. Calculate the NPV of this project.
b. Suppose instead that cash áows will continue for 10 years only, still declining at 8% per year. Recalculate the NPV.