VenFin Ltd Is an Investment Bank that specialises in venture capital. Their team of investment specialist is in the process of evaluating Blink, a venture capital company VenFin uses the CapM to calculate its required return for venture capital investments. The following additional information has been given with regards to this:

- Real risk free rate: 4.5%

- Inflation: 6.6% - Beta: 1.6

- Risk premium for such investments: 7%

Blink

The past couple of years has seen significant growth in the 'app' industry. Considered to be a young and developing industry, experts believe this industry has a lot of future potential and is seen as a highly attractive industry.

The founders of Blink want to open their own 'app' business, which will do and maintain app's for companies. They believe their idea will be hugely successful and have approached VenFin for funding. The plan to use this funding to do further research and hope to develop their idea into a marketable product which they plan to sell in a couple of years. The founders have agreed to a 20% profit share if the company takes off and are willing to allow VenFin and its venture capitalist clients to provide their expertise and experiences in the development process. VenFin's team is evaluating whether to invest R2.75 million for four years in this new 'app' company. Although this industry is highly competitive, the team believes this company has potential and will pay out R8.8 million at the end of four years, after which VenFin plans to sell their share in the company.

The teams research reveals that similar companies have the following conditional probabilities of failure, listed in the table below:

Year : 1

Probability of failure = 36%

Year : 2

Probability of failure = 21%

Year : 3

Probability of failure = 13%

Year : 4

Probability of failure = 8%

Questions:

1 - What stage would best describe the venture capital investment in Blink ? Name and elaborate

2 - What investment criteria will the team apply when analyzing Blink and does this company meet this criteria ?

3 - What is Blink's expected NPV and what will VenFin's decision be ?