Question

that makes smart road technology to warn cars of upcoming $4.5 million in venture financing. scenarios-pessimistic, expected, and o and valuation expectations the required rate of the fir and you have been asked to evaluate investing in a startup firm The startup is seeking road hazards. Your analysis reveals that there are three possible ute capital financing. , growth, you decide representing different profitability assume that Given the riskiness of this young company 24 percent. Given the following information and an expected sale of turn is 2 the firm in 7 years, det m in 7 years, determine whether your fund should invest in the startup: Pessimistic Expected Optimistic 25% 3090 Revenue in year 7 (Smillions) Profit margin $8 Price/earningsratio at sale 5.00% .00% 10.00% What is the NPV of the investment? (1.5 points)

Answer 1

Please find attached the explanation calculation and the answer.

The probability weighted value of the firm 7 years down the line is coming more than the required future value(at 24% per year return) hence the VC should invest in the firm.The NPV of the investment has been calculated accordingly keeping in mind the probability weights.

Hope the answer helps.Please comment for any clarifications.Thanks.

Pessimistic Expected lOptimistic Remarks Index Proba bility Outcome a Revenue in year 7(Smillions Profit Margin Price earning ratio at sale 45% 12 20% 8% 25% 30% 18 30% lit has to be in percenta 10%, assuming it's the ea ming price ratio 8% 5% d Net Profit(S millions 0.64 2.4 5.4 Formula:Revenue Net profit margin Formula:Net profit(earning)/price 54 eaming ratio e Pricelexpected value of the firm 12.8 30 Probability weighted value of the firm for different scenario)(ea) Expected value of the fim- sum of all probability weighted value($ million 3.2 13.5 16.2 Formula: Value(price) Probabilit 32.9 Fund's Investment todayl $ million Reguired rate of return per vear Time line(years 2496 2496 2496 7 7 Formula: investment(1+ rate of Expected future value of the investment by the firm(S million Expected future value of the firm Hence the probability weighted value of the firm is more than the value of the investment,hence the VC firm should invest in the 20.3 32.9 20.3 20.3 return)Atime as calculated abovelmarked in vellow ompan Formula: Probability weighted PV of the company under different scenario with 24% return expectation( $ million) ( f /(1+h) 0.712.993.59 Future probability weighted Value/(1+ rate of return)^time Expected PV of the company (sum of all probability weighted PVs($ k million | Invest ment todav( S million NPV of the investment ($ million) (kI 7.30 4.50 2.80 Expected PV- Investment today