Valuation of a Venture - Present Value

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Assignment 3: Valuation of a Venture

Company A has decided to invest in Company B. Company A needs to decide what percent of equity ownership in Company B it will need in exchange for a $10 million investment. Company A has an 18% target compound rate of return for its venture investments. It believes that there’s a 45% chance that the venture will be a total failure, a 40% chance of average performance, and a 15% chance of a very successful venture. Here’s the projected 5-year cash flow stream for the Company B investment that Company A anticipates will occur.

Outcome	Year 1	Year 2	Year 3	Year 4	Year 5
Total Failure	0	0	0	0	$ 0
Average	0	0	0	0	$40 million
Very Successful	0	0	0	0	$115 million

Here are your tasks:

1. Determine the present value of each scenario (total failure, average, and very successful) for Company B.
2. Determine the weighted average of the present values for the three scenarios. What is the total equity value for the Company B venture?
3. What is the acquired percentage of final ownership of Company B that Company A would need for its $20 million investment?