Just confused about calculating the value of the land - isnt interest rate supposed to be subtracted by growth rate? I.e. 0.1 - 0.04? And then we divide the value of the land with the preceeding value?
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Hey Ian, really appreciate your answer -
Just a small follow-up - isnt the 4% appreciation to be interpreted as growth? And secondly, the value they have calculated is NPV, which they have calculated by multiplying cashflow (100,000) with (1 + 0.04). Is there an underlying formula here I am missing?
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Just confused about calculating the value of the land - isnt interest rate supposed to be subtracted by growth rate?
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Hi Ukasha,
NPV is indeed calculated by divided the expected case flows by the interest rate minus the growth rate....where growth in cash flows is expected.
I may be missing something, but in multiple sections of the case, it is indicated that there is no growth. For example:
- "The market is expected to remain at the same level for the near future."
- "The gross margin will remain the same since the industry structure did not change."
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Ian is totally correct here! Be careful while reading the conditions of the case, it might confuse you and you'll unintentionally make some stupid mistakes.
Hello!
+1 to the previous answers.
This is why written cases are more difficult, sinc it´s difficult to get lost in the details, and it´s much easier to clarify when doing a case live
Hope it helps!
Cheers,
Clara
