Repeat Problem 1 with the change that Vencap’s cost of capital is 15%.
Problem 1
Vencap Enterprises is evaluating an investment opportunity that can be purchased for $37,000. Further product development will require contributions of $30,000 in Year 1 and $10,000 in Year 2. Then returns of $20,000, $60,000, and $40,000 are expected in the three following years.
a. Use the Valuation Principle to determine whether Vencap should make the investment if its cost of capital is 12% (compounded annually).
b. By what amount will the current economic value of Vencap be increased or decreased if it proceeds with purchasing the investment for $37,000?