Chapter $10$ Valuing Early$-$Stage Ventures

$[$Venture Present Values$]$ The TecOne Corporation is about to begin producing and selli,

its prototype product. Annual cash flows for the next five years are forecasted as:

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 invest$-$

ment will drop from $40$ percent to $20$ percent beginning in Year $6$ to reflect a drop in oper$-$

ating 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?