Reference no: EM132813848

Question - Google, Inc. is considering purchasing a new start-up company, SU Technology, located in a less developed market outside of the USA. It is your job to decide whether an investment like this will earn enough return to compensate them for the risk of investing, particularly in a start-up outside their domestic market. You estimate in the first 2-years of ownership SU Technology will not earn positive cash flow as all profits will be reinvested back into the business (meaning zero cash returned to owners). Starting in year 3, you forecast the Company will earn $1 million/year. Earnings are estimated to increase annually at a rate of 20%/year. Meaning, that in year 4, you'll get $1.2 million/year, etc. At the end of year 10, you plan on selling the business and believe you can sell it for $15 million at that time.

a) Calculate the maximum you would be willing to pay for this investment at a required rate of return of 18%.

b) If SU Technology asks you to pay $10 million, is it worth it? Why or why not?

c) You show the numbers to your boss and she is very excited because she sees this as a 50% return on investment (bought the company for $10 million and sell it for $15 million). Do you agree? Why or why not?