Steve wants to know the present value of his investment. The security company is currently in the development stage but hopes to “begin” operations…

Steve wants to know the present value of his investment. The security company is currently in the development stage but hopes to “begin” operations early next year. After-tax cash flows during the next five years are expected to be as follows: Year 1 = -$1.5 million, Year 2 = 0, Year 3 = $3 million, Year 4 = $2.5 million, and Year 5 = $3 million. Cash inflows are expected to grow at 5% annual rate thereafter. The discount rate is assumed at 30% for year 1-5 and 20% after year 5.

1) Determine the terminal or horizon value at the end of five years.= ?

2) What is the present value of the security company?

(3) What percent ownership interest should Steve be willing to give to a venture investor, Paul, for her $1,000,000 investment on pre-money base?

(4)What percent ownership interest should Steve be willing to give to a venture investor, Paul, for her $1,000,000 investment on post-money base?

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