Reference no: EM132906857

Question - Vail Venture Investors, LLC has recently acquired a 27 percent equity ownership in Black Hawk Products, Inc. in exchange for a $8 million investment. Vail Venture Investors is interested in estimating an expected compound rate of return on its investment. Depending on the success of products currently under development, Vail Venture's investment in Black Hawk could turn out to be a complete failure (black hole), barely surviving (living dead), or wildly successful (venture utopia). Vail Venture has assigned probabilities of 0.20, 0.60, and 0.20, respectively, to the three possible outcomes. Following are the three cash flow scenarios or outcomes for the Black Hawk Products investment that Vail Venture expects to exit at the end of five years.

Now assume under the venture utopia scenario that, in addition to the $65 million cash inflow in year 5, there will be an annual $1.6 million free cash flows (to be paid to Vail Venture Investors but not other equity investors). Vail Venture expects to receive this $1.6 million free cash flows under the venture utopia scenario in each of the five years that the Black Hawk investment will be maintained. No preferred annual cash flows are expected under either the black hole or the living dead scenarios.

Calculate the acquired percentage of final ownership (APFO) of Black Hawk Products that Vail Venture Investors would need to earn a 27 percent compound rate of return on its $8 million investment. Use the "mean flow method" described in the Leach and Melicher chapter 11. [Hint: use "goal seek" in a spreadsheet software program to find the necessary percentage of final ownership and show your excel solution procedure and your Goal seek application in detail.]

What would be Vail Venture's expected weighted average IRR on the Black Hawk Products venture if Vail Venture's equity ownership stake in Black Hawk products is 27%? Show your solution procedure in detail.