what is the NPV of the opportunity to buy VAI, assuming you commit to make all of the proposed investments

INSTRUCTIONS TO CANDIDATES

ANSWER ALL QUESTIONS

2. You are interested in investing in a new technology venture called Voice Activated Ignition, Inc. (VAI).  You are forecasting sales to be $20 Million when they go public in 3 years.  Comparable companies are selling for 4x Sales.  VAI needs $2 Million immediately, $5 Million next year, $5 Million in two years, and finally $20 Million to launch their product nationally in 3 years.  Assume that VAI’s cost of capital is 45% and their estimated volatility is 60% per year.  The risk-free rate is 5%.

 a)  What is the NPV of the opportunity to buy VAI, assuming you commit to make all of the proposed investments?

b)  What is the NPV if you commit to the investments in years 0 (now), 1, and 2, but you retain the option to invest or not invest in year 3?

 c)  Finally, what is the NPV if your only commitment is the initial $2 million investment?

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