Just confused about calculating the value of the land - isnt interest rate supposed to be subtracted by growth rate?

Question

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?

Answer 1

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."

Answer 2

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.

Answer 3

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

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