Present Value

A single projected cash flow of $121 million is expected in exactly two years. Using a discount rate of 10%, what is its present value?

1. A.$146.4 millionWrong. This multiplies by (1.10)^2 instead of dividing by it.
2. B.$100 millionCorrect. $121M ÷ 1.21 = $100 million.
3. C.$110 millionWrong. This only discounts for one year instead of two.
4. D.$121 millionWrong. This is the undiscounted future value, not its present value.

Why: PV = FV ÷ (1 + r)^n = $121M ÷ (1.10)^2 = $121M ÷ 1.21 = $100 million.

True or False: Holding all projected cash flows constant, increasing the discount rate (WACC) used in a DCF will decrease the resulting present value.

1. A.TrueCorrect. A higher discount rate reduces the present value of a given stream of future cash flows.
2. B.FalseWrong. Present value and discount rate move in opposite directions, holding cash flows constant.

Why: Present value is inversely related to the discount rate — a higher discount rate divides future cash flows by a larger factor, reducing their present value, all else equal.

A simplified two-year DCF for fictional Halworth Systems has: Year 1 FCF of $40 million with present value of $36.6 million, and Year 2 FCF of $50 million with present value of $41.9 million. The present value of the terminal value (computed separately) is $658 million. What is the implied enterprise value?

1. A.$78.5 millionWrong. This sums only the two explicit-period present values and omits the terminal value entirely.
2. B.$658 millionWrong. This is only the present value of the terminal value, omitting the explicit-period cash flows.
3. C.$736.5 millionCorrect. $36.6M + $41.9M + $658M = $736.5 million.
4. D.$90 millionWrong. This sums the undiscounted Year 1 and Year 2 FCF figures, ignoring both discounting and the terminal value.

Why: Implied EV = sum of the present values of all explicit-period free cash flows plus the present value of the terminal value = $36.6M + $41.9M + $658M = $736.5 million.