456 Hw10

Topics: Net present value, Cash flow, Rate of return Pages: 2 (214 words) Published: November 16, 2014
Your Unique Question Number: 24
rspatton@go.olemiss.edu
The TecOne 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..................... -56,299.00
2..................... -17,443.00
3.......................97,268.00
4.....................405,113.00
5.....................746,582.00
A. Assume annual cash flows are expected to remain at the $746,582.00 level after Year 5 (ie., Year 6 and thereafter). If TecOne investors want a 32.00% rate of return on their investment, calculate the venture’s present value. (#1)

746, 582/ (1.32) = 565,592.42
B. Now assume that the Year 6 cash flows are forecasted to be 897,279.00 in the stepping-stone year and are expected to grow at an 10.00% compound annual rate thereafter. Assuming that the investors still want a 32.00% rate of return on their investment, calculate the venture’s present value. (#2)

Year 6 = 897279
Year 5(DCF) = (897279/ (.32-.1) + 746582

897,279 x 1.10= 987,006.9
897,279/ (1.32)
C. Now extend Part B one step further. Assume that the required rate of return on the investment will drop from 32.00% to 17.00% beginning in Year 6 to reflect a drop in operating and business risk. Calculate the venture’s present value. (#3)

D. Let’s assume that TecOne investors have valued the venture as requested in Part C. An outside investor wants to invest $3,196,474.00 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 $3,196,474.00 new investment? (#4)
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