Johnson Transformers Inc.

Following is the five-year forecast for a new venture called Johnson Transformers: (all amounts in $000)

	2018	2019	2020	2021	2022
EBIT	$200	$1,800	$2,400	$3,000	$4,000
Capital Expenditures	$550	$350	$200	$150	$150
Changes in Working Capital	$40	$45	$50	$10	$(30)
Depreciation	$40	$80	$125	$150	$150

Beginning in year 2023 the annual growth in EBIT is expected to be 3%, a rate that is projected to be constant over Johnson Transformers remaining life as an enterprise. Beginning in 2023 Johnson's Transformers capital expenditures and depreciation are expected to offset each other (capex - depreciation = 0) and year to year changes in working capital are expected to be zero (working capital levels remain constant year over year). For discounting purposes consider 2018 as year 1.

Assume a tax rate is 21%

Johnson Transformers is own by J. Walter Johnson who has issued himself 1.2 million shares in return for an initial infusion of $100K in capital. Johnson is looking for $500,000 in equity investments and has approached a number of Business Angel networks and small Venture Capital firms.

David Royce of Royce Capital is very interested in Johnson Transformers and expects to provide Mr. Johnson a term sheet. Royce wants to structure the deal to provide him a 60% rate of return with a planned exit at the end of 2022 (year 5)

Given Royce's investment targets (exit in year 5 and a 60% annual rate of return) what should his valuation of Johnson Transformers be assuming that he agrees with J. Walter Johnson's financial projections noted above. To determine this valuation use the Net Present Value Method and select the answer from the choices below that best matches your calculations.