Anton is currently considering an investment in a virtual reality start-up called "VR Ltd". He plans to loan the start-up $100 million (at t = 0). Anton expects VR Ltd to make yearly payments to him for three years, as follows:

 

Payment at the end of year 1 (t= 1)	21 million
Payment at the end of year 2 (t= 2)	42 million
Payment at the end of year 3 (t= 3)	63 million

 

Anton's cost of capital is 30% p.a. (compounded annually).

 

Part a:

 The NPV of this investment is $ _____ million. As a result, Anton should _____ in VR Ltd.

 The internal rate of return for this investment is _____ the cost of capital.

 

 

Part b:

 After further market research, Anton now believes that VR Ltd will have long-term success in the VR market, and plans to restructure the payments as follows. The initial loan of $100 million at t = 0 remains the same. VR Ltd will make payments to him of $15 million per year forever, with the first payment to be made at the end of year one. Anton's cost of capital is 30% p.a. (compounded annually).

 Under this updated structure, the NPV of this investment is $____ million. As a result, Anton should ____ in VR Ltd.

 The internal rate of return for this investment is ____%.

 

 

Part C:

 Phuc has informed Anton that the RBA plans to loosen monetary policy in the future. As a result, Anton's cost of capital will be 30% p.a. for the first five years, and will decrease to 15.0% p.a. thereafter (compounded annually). Other than this, the loan structure from part b remains unchanged.

 Given this new information, the NPV of this investment is $_____ million. As a result, Anton should _____ in VR Ltd.

Answer rating: 100% (QA)

Part a Net Present Value NPV is a measure of an investments profitability Its a calculation of the current value of cash inflows and outflows by disco... View the full answer