# Net Present Value

**Topics:**Net present value, Rate of return, Cash flow

**Pages:**3 (762 words)

**Published:**December 15, 2012

Due date:

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Note: Individual attempt would be honored. Copy-pasted would carry Zero Marks.

1. The TecOne Corporation is about to begin producing and selling its prototype product. Annual cash flows for the next five years are forecasted as:

YearCash Flow

1 -$50,000

2 -$20,000

3$100,000

4$400,000

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 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 investment will drop from 40 percent to 20 percent beginning in Year 6 to reflect a drop in operating or business risk. Calculate the venture’s present value.

2.Assume the forecasted cash flows presented in Problem 1 for the TecOne Corporation venture also hold for the LowTec venture. However, investors in LowTec have an expected rate of return of 30 percent on their investment until Year 6 when the rate of return is expected to drop to 18 percent. The perpetuity growth rate for cash flows after Year 6 is expected to be 7 percent.

A. Determine the present value for the LowTec venture.

B. If an outside investor offers to invest $1,500,000 dollars today, what percentage ownership in LowTec should be given to the new investor?

3. Ben Toucan, owner of the Aspen BrewPub and Restaurant, wants to determine the present value of his investment. The Aspen...

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