An investor is evaluating a venture capital project that will require an investment of $1.4 million. The investor estimates that she will be able to exit the venture successfully in eight years. She also estimates that there is an 80 percent chance that the venture will not survive until the end of the eighth year. If the venture does survive until then, it is equally likely that the payoff at the time of exit will be either S25 million or $35 million. The investor is considering an equity investment in the project, and her cost of equity for a project with similar risk is 20 percent.
a. Compute the NPV of the venture capital project.
b. Recommend whether to accept or reject the project.