QUESTION

TechThree Corporation is about to begin producing and selling its prototype product. The companys forecasted annual cash flows for the next five years are as follows:

YEAR	CASHFLOW
1	-$97,500
2	-$38,750
3	$195,000
4	$781,250
5	$1,562,500

Required:

a. Assume the annual cash flows are expected to remain at $ 1,562,500 level after Year 5 (i.e., Year 6 and thereafter). If TechThree investors want a 40 percent rate of return on their investment, compute the present value of the venture.

b. Calculate the ventures present value assuming the following:

i. That the Year 6 cash flows are forecasted to be $ 1,757,500 in the stepping-stone year and are expected to grow at an 8 percent compound annual rate thereafter.

ii. That the investors still want 40 percent rate of return on their investment.

c. Now extend part (b) above one step further and assume that the required rate of return on the investment will drop from 40 to 20 percent beginning in Year 6 to reflect a drop in operating or business risk. Compute the present value of the venture.

d. Assume that TechThree investors have valued the venture as requested in part (b) above and an outside investor wants to invest $5.975 million in TechThree Corporation now (at the end of Year 0). What percentage of ownership in the venture should the TechThree investors give up to the outside investor for a $ 5.975 million new investment?