A small start-up biotech firm anticipates that it will have cash outflows of $200,000 per year at the end of the next 3 years. Then the firm expects a positive cash flow of $50,000 at the EOY 4 and positive cash flows of $250,000 at the EOY 5–9. Based on these estimates, would you invest money in t

Question

A small start-up biotech firm anticipates that it will have cash outflows of [latex]\$ 200,000[/latex] per year at the end of the next 3 years. Then the firm expects a positive cash flow of [latex]\$ 50,000[/latex] at the EOY 4 and positive cash flows of [latex]\$ 250,000[/latex] at the EOY 5-9. Based on these estimates, Would you invest money in this company if your MARR is [latex]15 \%[/latex] per year? (all sections).

Accepted Answer

Find the IRR:

[latex]\begin{aligned}0=&-\$ 200,000\left(P / A, i^{\prime}, 3 ight)+\$ 50,000\left(P / F, i^{\prime}, 4 ight) \&+\$ 250,000\left(P / A, i^{\prime}, 5 ight)\left(P / F, i^{\prime}, 4 ight)\end{aligned}[/latex]

By trial and error, [latex]i^{\prime}=17.65 \%[/latex], which is greater than the MARR. As a matter of interest, the [latex]\mathrm{PW}(15 \%)=\$ 51,094[/latex]. But the simple payback period is 7 years, so the gamble in this firm is probably too great for a risk intolerant investor (like most of us).

Question 5.T-Y-S.K: A small start-up biotech firm anticipates that it will have ...

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