Question
Please show all work and fill out charts. Thank you. [Venture Present Values] The TechTwo Corporation is about to begin producing and selling its prototype
Please show all work and fill out charts. Thank you.
[Venture Present Values] The TechTwo 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 -$60,000
2 -$20,000
3 $100,000
4 $500,000
5 $800,000
A. Assume annual cash flows are expected to remain at the $800,000 level after Year 5 (i.e., Year 6 and thereafter). If TechTwo investors want a 40 percent rate of return on their investment, calculate the ventures present value.
Y1 | Y2 | Y3 | Y4 | Y5 | |
Annual Cash Flow |
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Terminal Value (VCF at Time T/Terminal discount rate - terminal growth rate) |
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Total Flow to be Discounted (sum two rows above) |
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Present Value @40% |
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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.
Y1 | Y2 | Y3 | Y4 | Y5 | |
Annual Cash Flow |
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Terminal Value (VCF at Time T/Terminal discount rate - terminal growth rate) |
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Total Flow to be Discounted (sum two rows above) |
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Present Value @40% |
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- 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.
Y1 | Y2 | Y3 | Y4 | Y5 | |
Annual Cash Flow |
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Terminal Value (VCF at Time T/Terminal discount rate - terminal growth rate) |
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Total Flow to be Discounted (sum two rows above) |
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Present Value @40% |
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- Lets assume that TechTwo investors have valued the venture as requested in Part C. An outside investor wants to invest $2,000,000 in TechTwo now (at the end of Year 0). What percentage of ownership in the venture should the TechTwo investors give up to the outside investor for a $2,000,000 new investment?
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