An Internet portal aimed at pet owners has just developed a nuclear sewing machine EXERCISE and offers you the opportunity to invest in the industrialisation of this product. The project will last 5 years, and for 4 years, you will not be paid a dividend. But if the company is floated on the stock exchange after 5 years (which is the plan) you will get €5m. The founders of the portal estimate that your initial investment will be about €2.5m.
What return will this project bring you?
Given the project’s risk, you decide that you require a return of more than 20%. What investment do you offer?
The founders, keen to obtain the €2.5m in question and believing firmly in the success of their project, offer you the following arrangement: you give them €2.5m and, if all goes well, you’ll get €5m after 5 years. If the project fails, then they’ll give you €1m after 5 years out of the €2.5m you invested. They believe that this reduces your risk considerably. How would you go about tackling this problem (without doing any calculations)?