Question
Hello, Could you help me with the following question. Could you also detail the solution formula and calculations. Thanks Leslie Parrot, owner of the Rockies
Hello,
Could you help me with the following question. Could you also detail the solution formula and calculations. Thanks
Leslie Parrot, owner of the Rockies Restaurant, wants to determine the present value of her investment. The Rockies Restaurant is currently in the development stage but hopes to "begin" operations early next year. After-tax cash flows during the next five years are expected to be as follows: Year 1 = 0, Year 2 = 0, Year 3 = 0, Year 4 = $1.5 million, and Year 5 = $2 million. Cash inflows are expected to be $2.15 million in Year 6 and are expected to grow at a 6 percent annual rate thereafter. Recall from Chapter 7 that venture investors often use different discount rates when valuing ventures at various stages of their life cycles. For example, target discount rates by life cycle stage are development stage, 50 percent; startup stage, 40 percent; survival stage, 35 percent; and early rapid-growth stage, 30 percent. As ventures move from their late rapid-growth stages and into their maturity stages, a 20 percent discount rate is often used.
A.Let's assume the Rockies Restaurant was started early last year and, thus, is in its startup stage and has the same future cash flow expectations as indicated earlier. Using a typical startup-stage rate of return or discount rate, calculate the present value of the Rockies Restaurant.
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