2. [Venture Present Values] The TechTwo 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 -$60,000

2 -$20,000

3 $100,000

4 $500,000

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 TechTwo investors want a 40 percent rate of return on their investment, calculate the ventures present value.

	Y1	Y2	Y3	Y4	Y5
Annual Cash Flow
Terminal Value (VCF at Time T/Terminal discount rate - terminal growth rate)
Total Flow to be Discounted (sum two rows above)
Present Value @40%

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 ventures present value.

	Y1	Y2	Y3	Y4	Y5
Annual Cash Flow
Terminal Value (VCF at Time T/Terminal discount rate - terminal growth rate)
Total Flow to be Discounted (sum two rows above)
Present Value @40%

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 ventures present value.

	Y1	Y2	Y3	Y4	Y5
Annual Cash Flow
Terminal Value (VCF at Time T/Terminal discount rate - terminal growth rate)
Total Flow to be Discounted (sum two rows above)
Present Value @40%

D. Lets assume that TechTwo investors have valued the venture as requested in Part C. An outside investor wants to invest $2,000,000 in TechTwo now (at the end of Year 0). What percentage of ownership in the venture should the TechTwo investors give up to the outside investor for a $2,000,000 new investment?