Question: Blue Mountain, Inc. announces that it will invest $140 million in projects each year forever. All projects are expected to generate a 14% rate of return on its beginning-of-period book value each year for five years. The required return for this type of project is 11%. Blue Mountain, Inc. depreciates its cost of assets straight-line over the life of the investment.
Q1. What is the value of Blue Mountain under this investment strategy? You may want to prepare a table to show details.
Q2. Does the long-term residual earning show any growth in the above valuation?
Q3. What is the value added to the internal investment of $140 million?
Q4. Why is the value added greater than 14% of the initial investment?