Year Cash Flow 1 -$60,000 2 -$30,000 3 $200,000 4 $400,000 5 $800,000

Assume annual cash flows are expected to remain at the $800,000 level after Year 5 (i.e. Year 6 and thereafter). If Alpha investors want a 30 percent rate of return on their investment, calculate the ventures present value. (5%)

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 a 5 percent compound annual rate thereafter. Assuming that the investors still want a 30 percent rate of return on their investment, calculate the ventures present value. (5%)

c. Now extend Part B one step further. Assume that the required rate of return on the investment will drop from 30 percent to 20 percent beginning in Year 6 to reflect a drop in operating or business risk. Calculate the ventures present value. (5%)

d. Lets assume that Alpha investors have valued the venture as requested in Part C. An outside investor wants to invest $2 million in Alpha now (at the end of Year 0). What percentage of ownership in the venture should the Alpha investors give up to the outside investor for a $2 million new investment? (5%)