But why do you need to discount the 6.5 million if it is already for Year 1 ?
So I am doing this case study for university and the lecturer is madly unhelpful. Basically you are asked to calculate the value of the business in the previous question using the free cash flows. Now in this question they introduce an expansion project for t=1 (end of this year/start of next year). It says that the project will cost 16million and the manager re-estimate the project to earn a net future value of 6.5million at commencement in a year's time. Does this net future value account for the initial $16million cost? Like is the cost included in the managers calculations? Or should I get the value of the business with expansion by using what I got in the previous question and adding 6.5mill/(1+discount rate) - 16mill/(1+discount rate). I understand that Net future value is the present value at a future date and present values include the discounted subsequent cash flows...But i have no idea if that includes the initial cost. If it did then I assume I would simply add 6.5mill(1+discount rate) to the determined value of the business in the previous question. Right?
