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LOS h: Calculate the net present value (NPV) of a venture capital project, given the project's possible payoff and conditional failure probabilities. ffice ffice" />
Q1. An investor is considering investing in a venture capital project that will have a large payoff at exit, which is estimated to occur in four years. The investor realizes that the risk of failure is high, given the following estimated probabilities:
|
Year |
1 |
2 |
3 |
4 |
|
Failure Probability |
0.30 |
0.28 |
0.28 |
0.25 |
The probability that the project will survive to the end of the fourth year is:
A) 25.00%.
B) 27.22%.
C) 27.75%.
Correct answer is B)
The probability is calculated as: (1 ? 0.30) × (1 ? 0.28) × (1 ? 0.28) × (1 ? 0.25) = 0.2722 or 27.22
Q2. Which of the following statements regarding venture capital theory is TRUE?
A) The probability of failure for a venture capital project will diminish over time.
B) The net present value of a venture capital project that fails is zero.
C) A venture capital project’s expected NPV is a probability-weighted average of the two possible outcomes: success and failure.
Correct answer is C)
The net present value of a venture capital project that fails is almost certainly less than zero. The probability of failure may or may not diminish over time, depending on the project. The expected NPV is a probability-weighted average of the two possible outcomes: success or failure
Q3. A portfolio manager is analyzing a $2,000,000 venture capital investment. If the project succeeds until the end of the sixth year, the net present value (NPV) of the project is $6,587,000. The project has a 32.69 percent probability of surviving to the end of the sixth year. The expected NPV of the project is:
A) $6,587,000.
B) $2,153,290.
C) $807,090.
Correct answer is C)
The project’s expected NPV is a probability-weighted average of the two possible outcomes: $6,587,000 if it is successful or the loss of the initial $2,000,000 investment if it fails. The expected NPV for the project is: (0.3269 × 6,587,000) + (0.6731 × -$2,000,000) = $807,090
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发表于 2009-2-28 17:31
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