Problem:
Company Omega is undertaking a major investment. It is expected to cost £1 million in initial investment at t = 0, £ 1 million at t = 1 and £ 1 million at t =2. The investment is expected to generate at the end of year t = 2 a dividend flow of £1.0 million, which is expected to grow annually 20% in years t = 4, t = 5 and t = 6.
Required:
Assume a cost of capital 25% and calculate the Net Present Value of the investment at t = 0 using cash flows up to t = 6. Then assume that dividends will continue to grow in the future and calculate the value of the company at t = 7.
Note: Explain the solution in detail.