1. You are a financial analyst for a financial firm specializing in investing in young companies. The CFO of your firm asked you to value a buy-and-hold investment project. This venture can be sold at the market value upon maturity 20 years from now. After intensive research, you have come up with the following information regarding the cash flows of the venture in three different scenarios. Compound annual returns for the different scenarios are based on an estimated initial once-and-for-all investment cost $10,000.

Scenario	Probability	Return on Market	Projected Cash Flow per acre at Harvest	Compound Annual Rate of Return on Investment
Boom	40%	25%	$164,000	15%
Normal	30%	10%	$96,000	12%
Bust	30%	-10%	$67,000	10%

After confirming that the market risk premium for similar investment projects is 4.5%, you have estimated that, based on risk-adjusted discount rate (RADR) method, the NPV of this project is $24,749. To be more confident of your conclusion, you have re-estimated the value of the project using certainty equivalent method (CEQ) and concluded that the NPV of this project is $24,968. Hence, you have recommended to the CFO that this project is worth pursuing. The CFO, after examining the information you have presented to him, however, concluded that this investment should not go ahead. His rational is that the venture is very risky and the best way to evaluate it is by using venture capital (VC) valuation method with 20% discount rate.

1. What is the NPV of the investment based on the method suggested by your CFO?

2. Discuss the strengths and weaknesses of VC valuation method relative to RADR and CEQ.

3. Do you think the 20% discount rate is justifiable? Why