Taggart Transcontinental is considering adding a trucking division to expand the coverage of its existing rail lines. The trucking division will cost $1,000,000 and is expected to generate free cash flows of $100,000 for each of the next five years. Taggart Transcontinental forecasts that future free cash flows after year 5 will grow at 2% per year, forever. Taggart Transcontinental's cost of capital is 10%.
The continuation value for the trucking division in year five is closest to:
A. 1,375,000 B. 1,250,000 C. 1,000,000 D. 1,275,000
The NPV for the trucking division is closest to:
A. 170,750 B. 250,000 C. 212,550 D. 200,000 E. 312,500