Venture Present Values] Ben Toucan, owner of The Aspen Restaurant, wants to determine the present value of his investment. The Aspen Restaurant is currently in the development stage but Toucan hopes to “begin” operations early next year. After-tax cash flows during the next five years are expected to be as follows: Year 1 5 0, Year 2 5 0, Year 3 5 0, Year 4 5 $2.5 million, and Year 5 5 $3 million. Cash inflows are expected to be $3.18 million in Year 6 and are expected to grow at a 6 percent annual rate thereafter. Recall from Chapter 7 that venture investors often use different discount rates when valuing ventures at various stages of their life cycles. For example, target discount rates by life cycle stage are: development stage, 50 percent; startup stage, 40 percent; survival stage, 35 percent; and early rapid-growth stage, 30 percent. As ventures move from their late rapid-growth stages and into their maturity stages, a 20 percent discount rate is often used. Present Value of TV assuming Development Stage t=1 to t=5?_. PV of Cash Flows assuming Development Stage t=1 to t=5?_____________
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
[Venture Present Values] Ben Toucan, owner of The Aspen Restaurant, wants to determine the present value of his investment. The Aspen Restaurant is currently in the development stage but Toucan hopes to “begin” operations early next year. After-tax cash flows during the next five years are expected to be as follows: Year 1 5 0, Year 2 5 0, Year 3 5 0, Year 4 5 $2.5 million, and Year 5 5 $3 million.
- Present Value of TV assuming Development Stage t=1 to t=5?_.
- PV of Cash Flows assuming Development Stage t=1 to t=5?_____________
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