Explain Venture capital calculations
After this summer at Harvard, you decide to stay in the area and start your own business. You think you see a couple of opportunities.
Knowing first-hand the pressure Harvard students are under, you consider opening a business that allows them to let off steam and get rid of their aggression: A paintball center right in Harvard Square.
The cost of the project would be $100,000, payable up front, while revenues are expected to be $40,000, received at the end of the first year, and $40,000, received at the end of the second year. At the end of the second year, you plan to sell the business for $30,000.
a. If the interest rate on comparable assets is 8%, is this project worthwhile? Show your calculations.
You are also considering a second business opportunity: Supplying fish, fresh from the bottom of the Charles River, to Harvard Dining Services, for the next three years in return for an up-front payment from them of $10,000. You figure it will cost you $4,000 a year in supplies to provide this culinary joy.
So, the revenue and costs of the project can be summarized as follows:
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Immediate and only revenue:
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$10,000
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Costs in Year 1:
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$4,000
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Costs in Year 2:
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$4,000
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Costs in Year 3:
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$4,000
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b. Assume that the interest rate is such that the project just breaks even. Should this project be undertaken if the interest rate rises? Explain