Reference no: EM132354694

[Venture Present Values] Leslie Parrot, owner of the Rockies Restaurant, wants to determine the present value of her investment. The Rockies Restaurant is currently in the development stage but hopes to "begin" operations early next year. After-tax cash flows during the next five years are expected to be as follows: Year 1 = 0, Year 2 = 0, Year 3 = 0, Year 4 = $1.5 million, and Year 5 = $2 million. Cash inflows are expected to be $2.15 million in Year 6 and are expected to grow at a 6 percent annual rate thereafter. Recall from Chapter 7 that venture investors often use different discount rates when valuing ventures at various stages of their life cycles. For example, target discount rates by life cycle stage are development stage, 50 percent; startup stage, 40 percent; survival stage, 35 percent; and early rapid-growth stage, 30 percent. As ventures move from their late rapid-growth stages and into their maturity stages, a 20 percent discount rate is often used.

1. Determine the Rockies Restaurant's terminal or horizon value at the end of five years, assuming the venture will be entering its maturity stage.
2. What is the present value of the Rockies Restaurant, assuming that it is a development-stage venture?