The Dragons (from CBC's Dragon's Den) are considering a venture from an Albertan entrepreneur. His proposal requires the Dragons to invest $500,000 immediately. Based on market conditions, the product is estimated to have year-end profits of $100,000//$200,000//$300,000//$200,000//and finally $100.000. The Dragons will invest only if the internal rate of return exceeds their cost of capital lof 20%. Should they invest?

The Dragons (from CBC's Dragon's Den) are considering a venture from an Albertan entrepreneur. His proposal requires the Dragons to invest $500,000 immediately. Based on market conditions, the product is estimated to have year-end profits of $100,000//$200,000//$300,000//$200,000//and finally $100.000. The Dragons will invest only if the internal rate of return exceeds their cost of capital lof 20%. Should they invest?

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 8P

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The Dragons (from CBC's Dragon's Den) are considering a venture from an Albertan entrepreneur. His proposal requires the Dragons to invest $500,000 immediately. Based on market conditions, the product is estimated to have year-end profits of $100,000, $200,000, $300,000, $200,000, and finally $100,000. The Dragons will invest only if the internal rate of return exceeds their cost of capital of 20%. Should they invest?
You are considering investing in a start up company. The founder asked you for $290,000 today and you expect to get $980,000 in 8 years. Given the riskiness of the investment opportunity, your cost of capital is 25%. What is the NPV of the investment opportunity? Should you undertake the investment opportunity? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.
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