CFA Level I · CFA Level I Exam · Real Estate and Infrastructure
A brownfield infrastructure asset is expected to pay a net cash flow of 12 million at the end of each of the next 3 years, after which the concession ends with no residual value. The investor's required return is 10%. The value of the asset is closest to:
The asset is worth about 29.8 million. Discount three annual cash flows of 12 million at 10%: the annuity factor is 2.4869, so the value is 12 times 2.4869. Summing the undiscounted flows to 36 million ignores the time value of money and overstates value.
- A29.8 millionCorrect
- B34.6 million
- C36.0 million
Explanation
Annuity factor for 3 years at 10% = (1 - 1.1^-3)/0.10 = (1 - 0.751315)/0.10 = 2.48685. Value = 12 x 2.48685 = 29.84 million. The 36.0 million option ignores discounting (12 x 3), and 34.6 million is a wrong discounting error.
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