LOS h: Calculate the net present value (NPV) of a venture capital project, given the project's possible payoff and conditional failure probabilities.

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:

The probability that the project will survive to the end of the fourth year is:

A)   25.00%.

B)   27.22%.

C)   27.75%.

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.

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.

LOS h: Calculate the net present value (NPV) of a venture capital project, given the project's possible payoff and conditional failure probabilities. fficeffice" />

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

thanks

thanks

.