You Work for Venture's R Us and You Have Been

question 8

Essay

You work for Venture's r Us and you have been asked to evaluate investing in a startup firm that makes smart road technology to warn cars of upcoming road hazards. The startup is seeking $4.5 million in venture capital financing. Your analysis reveals that there are three possible scenarios- pessimistic, expected, and optimistic-representing different profitability, growth, and valuation expectations. Given the riskiness of this young company, assume that you decide the required rate of return is 24 percent. Given the following information and an expected sale of the firm in 7 years, determine whether your fund should invest in the startup:
$\begin{array} { | l | c | c | c | } \hline & \text { Pessinistic } & \text { Esggected } & \text { Optinistic } \\\hline \text { Prabability of autcame } & 25 \% & 45 \% & 30 \% \\\hline \text { Revenue in year } 7 ( \mathbf { 4 m i l l i a n s ) } & 8 & 12 & 18 \\\hline \text { Prafit marpgn } & \$ 8 & \$ 20 & \$ 30 \\\hline \text { Pricelearning ratio at sale } & 5.00 \% & 8.00 \% & 10.00 \% \\\hline\end{array}$ What is the NPV of the investment?

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Definitions:

Public Disclosure

The act of making information or data openly accessible and available to the general public.

Universalization Test

The ethical guideline that urges us to consider, before we act, what the world would be like if everyone acted in this way.

Ethical Guidelines

Standards of behavior and professional conduct expected within a specific field or profession.

Stakeholder

An individual or group with an interest or concern in the success of an organization, project, or outcome.