Assume annual cash flows are expected to remain

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The TecOne 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 ...... - $ 50,000

2 ...... - $ 20,000

3 ........ $100,000

4 ........ $400,000

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 TecOne investors want a 40 percent rate of return on their investment, calculate the venture's present value.

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 venture's present value.

C. 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 venture's present value.

D. Let's assume that TecOne investors have valued the venture as requested in Part C. An outside investor wants to invest $3 million in TecOne now (at the end of Year 0). What percentage of ownership in the venture should the TecOne investors give up to the outside investor for a $3 million new investment?

Reference no: EM131124257

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