Consider the situation of a venture capitalist who is contemplating a $3.5 million investment in a company that expects to require no further capital through year five. The company is expected to earn $2.5 million in year five and should be comparable to companies commanding price/earnings ratios (PERs) of about 15. The venture capitalist expects to harvest his investment at that point through sale of his stock to an acquiring company. Assume further that the VC requires a 50% projected internal rate of return (IRR) on a project of this risk. What price should he pay now for the stock?
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