repreneur has a project which generates the following (sure) cash flow stream: t=1  t=2  t=3 $20    $30    $40  in million dollars. The initial investment costs (at t=0) are $40 million. In addition, the entrepreneur has to incur the following operating costs (in million dollars) to run the business in the subsequent periods:  t=1  t=2  t=3 $10    $10    $10 The entrepreneur can borrow and save any amount at any date at the one period interest rate r=8% from a bank. (a) Should the entrepreneur undertake the project?  Suppose a private equity firm wants to buy the whole project (at t=0). Once the private equity firm owns the project it has to finance all costs (setup cost and operating costs) itself.  (b) What is the minimum price at which the entrepreneur is willing to sell?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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An entrepreneur has a project which generates the following (sure) cash flow stream:

t=1  t=2  t=3

$20    $30    $40 

in million dollars. The initial investment costs (at t=0) are $40 million. In addition, the entrepreneur has to incur the following operating costs (in million dollars) to run the business in the subsequent periods: 

t=1  t=2  t=3

$10    $10    $10

The entrepreneur can borrow and save any amount at any date at the one period interest rate r=8% from a bank.

(a) Should the entrepreneur undertake the project? 

Suppose a private equity firm wants to buy the whole project (at t=0). Once the private equity firm owns the project it has to finance all costs (setup cost and operating costs) itself.

 (b) What is the minimum price at which the entrepreneur is willing to sell?

 c) What is the maximum price the private equity firm is willing to pay?

 

Expert Solution
Step 1

Net present value is value added to business and net present value can be calculated from the present value of cost and present value of annual cash flow.

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