Mae Chen, Manager of Chen Fabrics, Is Comparing Two Assumptions

Multiple Choice

Mae Chen, manager of Chen Fabrics, is comparing two assumptions about the terminal cash flow arising from an expansion project. The Year 7 cash flow is $250,000. One assumption is that subsequent cash flows are constant. An equally valid assumption is that subsequent cash flows will grow at a four percent rate. If Chen Fabrics' cost of capital is 11 percent, what is the difference in the calculation of the project's terminal value?

A) Under $25,000
B) Between $250,000 and $500,000
C) Between $500,001 and $1,000,000
D) Over 1,000,000