Venture Capital Financing
TMC Is a venture capital financier. It received a proposal for financing requiring an Investment of r45 crore which returns 2600 crore after 6 years If succeeds. However, it may be possible that the project may fall at any time during the six years.
The following table provide the estimates of probabilities of the failure of the projects.
Year 2 3 4 5 6
Probability of Failure 0.28 0.25 0.22 0.18 0.18 0.10
In the above table the probability that the project tails In the second year Is given that it has survived throughout year 1. Similarly for year 2 and so forth.
TMC is considering an equity Investment In the project. The beta of this type of project Is 7. The market return and risk free rate of return are 8% and 6% respectively. You are required to compute the expected NPV of the venture capital project and advice the TMC.