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Aspen Restaurant Investment Valuation

1) Ben Toucan, owner of the Aspen Restaurant, wants to determine the present value of his investment in the development stage restaurant. Cash flows are expected to be $0 for the first three years, $2.5 million in year 4, and $3 million in year 5. 2) The terminal value of the restaurant after 5 years is calculated to be $22,714,285.71 using a long term growth rate of 6% and discount rate of 20%. 3) The present value of the restaurant is calculated to be $3,880,070.55 using a discount rate of 50% for the development stage.

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771 views1 page

Aspen Restaurant Investment Valuation

1) Ben Toucan, owner of the Aspen Restaurant, wants to determine the present value of his investment in the development stage restaurant. Cash flows are expected to be $0 for the first three years, $2.5 million in year 4, and $3 million in year 5. 2) The terminal value of the restaurant after 5 years is calculated to be $22,714,285.71 using a long term growth rate of 6% and discount rate of 20%. 3) The present value of the restaurant is calculated to be $3,880,070.55 using a discount rate of 50% for the development stage.

Uploaded by

IT man
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd

EXERCISES/PROBLEMS

4. [Venture Present Values] Ben Toucan, owner of the Aspen Restaurant, wants to
determine the present value of his investment. The Aspen Restaurant 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 = 0, Year 2 = 0, Year 3 =
0, Year 4 = $2.5 million, and Year 5 = $3 million. Cash inflows are expected to be $3.18
million in Year 6 and are expected to grow at a 6 percent annual rate thereafter. Recall
from Chapter 7 that venture investors often use different discount rates when valuing
ventures at various stages of their life cycles. For example, target discount rates by life
cycle stage are development stage, 50 percent; startup stage, 40 percent; survival stage,
35 percent; and early rapid-growth stage, 30 percent. As ventures move from their late
rapid-growth stages and into their maturity stages, a 20 percent discount rate is often
used.

A. Determine the Aspen BrewPub’s terminal or horizon value at the end of five years.
VCF5 1  .06  3,180,000
Terminal Value = = = 22,714,285.71
rg 20%  6%

B. What is the present value of the Aspen BrewPub?

VCF1 VCF2 VCF3 VCF4 VCF5  TermnalVal ue


PV =    
(1  r ) (1  r ) 2
(1  r ) 3
(1  r ) 4
(1  r ) 5
2,500,000 3,000,000  22,714,285.71
=0+0+0+  = 3,880,070.55.
(1  50%) 4 (1  50%) 5

C. What percent ownership interest should Ben Toucan be willing to give to a venture
investor, Sherri Isitar, for her $1,000,000 investment?

Under the assumption, (consistent with the textbook treatment in Section 9.2) that the
cash flow in years 4 and 5 are fixed and have already incorporated the use of the new
financing (in operating expenses), then the percent of this fixed $3,880,070.55 “pie”
is:

1,000,000
 25.77%
3,880,070.55

Some students will assume that the $1,000,000 is not already projected as being used
to generate the $3,880,070.55 “pie.” (This is the type of conjecture that is suggested
in founder’s initial “thinking” in Section 9.1, but is not consistent with the story
elsewhere.) Accordingly, they will assume that that pie is enhanced by the
$1,000,000 in present value or equivalently that the future value of the $1,000,000
will survive to be added to $22,714,285.71 terminal value currently conjectured. The
percent of this larger enhanced pie is therefore smaller at

1,000,000
 20.49%
1,000,000  3,880,070.55

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