Question
2 . [Venture Present Values] The TecOne Corporation is about to begin producing and selling its prototype product. Annual cash flows for the next five
2. [Venture Present Values] The TecOne Corporation is about to begin producing and selling its prototype product. Annual cash flows for the next five years are forecasted as:
Year Cash Flow
1 -$50,000
2 -$20,000
3 $100,000
4 $400,000
5 $800,000
(Feel free to solve using Excel and copy/paste your results below. A table is set up below to get you started; you can copy and paste this into Excel. )
A. Assume annual cash flows are expected to remain at the $800,000 level after Year 5 (i.e., Year 6 and thereafter). If TecOne investors want a 40 percent rate of return on their investment, calculate the ventures present value.
Assume this cell is A1 in Excel | Y1 | Y2 | Y3 | Y4 | Y5 |
Annual Cash Flow | Use cash flows provided above | Use cash flows provided above | Use cash flows provided above | Use cash flows provided above | Use cash flows provided above |
Terminal Value (VCF at Time T/Terminal discount rate - terminal growth rate) | (These will be blank) | (These will be blank) | (These will be blank) | (These will be blank) | (TV Goes Here) |
Total Flow to be Discounted (sum two rows above) |
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|
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Present Value @40% | If using Excel, enter =NPV(0.4, B4:F4) | (These will be blank) | (These will be blank) | (These will be blank) | (These will be blank) |
B. Now assume that the Year 6 cash flows are forecasted to be $900,000 in the stepping stone year and are expected to grow at an 8 percent compound annual rate thereafter. Assuming that the investors still want a 40 percent rate of return on their investment, calculate the ventures present value.
- Now extend Part B one step further. Assume that the required rate of return on the investment will drop from 40 percent to 20 percent beginning in Year 6 to reflect a drop in operating or business risk. Calculate the ventures present value.
- Lets assume that TecOne investors have valued the venture as requested in Part C. An outside investor wants to invest $3,000,000 in TecOne now (at the end of Year 0). What percentage of ownership in the venture should the TecOne investors give up to the outside investor for a $3,000,000 new investment?
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