Reference no: EM133069142

A Venture capital firm is considering making an investment in XYZ Inc. today by agreeing to purchase 1 million common shares in XYZ from the firm at a price of $4 per share. There are currently 3 million common shares of XYZ outstanding and no additional shares will be issued before the firm's planned exit in 5 years. The Venture capital firm estimates that the probability of failure for this investment in each of the next five years is as outlined in the following table. If the firm fails, it will be worth nothing, while if the firm has a successful exit in 5 years the valuation of the entire firm at that time is anticipated to be $100 million. If the Venture capital firm wants to earn an annual return of 20% on its investment should the Venture capital firm accept this investment? Show all the steps involved in your analysis and clearly outline your recommendation.

Probability of Failure:

Year 1 = 30%

Year 2 = 25%

Year 3 = 20%

Year 4 = 15%

Year 5 = 15%

This is all information I have and want to do some calculations, Venture capital (VC) investment

Show all steps with formula, and assumptions.