Rocky Mountain Drilling Inc has a new shale oil field under developmen

Rocky Mountain Drilling Inc has a new shale oil field under development.

The firm estimates free cash flows to the firm (FCFF) of $2,000,000 at the end of one year and increases of 20% per year for each of the next two years, and then year-end fcff of $3,000,000 per year for five years before exhausting the oil in the field. If the firm has a WACC of 12.5%, what is the value today of these expected cash flows?
A) $8,485,936
B) $10, 817,300
C) $13,198,893
D) $20,280,000

ANSWER

C
Explanation: C) Using Excel, PV of 200000, 2400000, 2880000, 3000000, 3000000, 3000000, 3000000, 3000000, at a rate of 12.5%.