CFA Practice Question

CFA Practice Question

A VC is considering whether to invest in a project. The VC estimates that in 3 years there is a 20% chance that the firm will be able to do an IPO, in which case the VC would receive $5 M. There is an 80% chance that the firm will not be able to do an IPO, in which case the VC will be able to liquidate his position and receive $1 M. The project requires the VC to invest $1.5 M today. The rate of discount for the VC is 15%. What is the NPV of the project for the VC?
A. $0.0652 M
B. $1.7876 M
C. -$0.3165 M
Explanation: First calculate expected cash flow = prob1 * cashflow1 + prob2 * cashflow2 = 80% * $1 M + 20% * $5M = $1.8 M Next discount expected cash flow for 3 years to get $1.8 M / (1.15^3) = $1.1835 M Finally subtract initial investment $1.5 M to get NPV.

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