1．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)   $4,587,000.

C)   $807,090.

D)   $2,153,290.

2．Which of the following statements regarding venture capital theory is TRUE?

A)   The net present value of a venture capital project that fails is zero.

B)   A venture capital project’s expected NPV is a probability-weighted average of the two possible outcomes: success and failure.

C)   It is impossible to calculate the expected NPV of a venture capital project because of the uncertainty of future cash flows.

D)   The probability of failure for a venture capital project will diminish over time.

3．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)   27.75%.

C)   72.78%.

D)   27.22%.

1．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)   $4,587,000.

C)   $807,090.

D)   $2,153,290.

The correct answer was 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: (.3269 × 6,587,000) + (.6731 × -$2,000,000) = $807,090

2．Which of the following statements regarding venture capital theory is TRUE?

A)   The net present value of a venture capital project that fails is zero.

B)   A venture capital project’s expected NPV is a probability-weighted average of the two possible outcomes: success and failure.

C)   It is impossible to calculate the expected NPV of a venture capital project because of the uncertainty of future cash flows.

D)   The probability of failure for a venture capital project will diminish over time.

The correct answer was B)

The net present value of a venture capital project that fails is almost certainly less than zero. It is difficult to estimate the NPV of a project, but it is not impossible. 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.

3．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)   27.75%.

C)   72.78%.

D)   27.22%.

The correct answer was D)

The probability is calculated as: (1-0.30) × (1-0.28) × (1-0.28) × (1-0.25) = .2722 or 27.22%