Question 5.KK: A small start-up biotech firm anticipates that it will have ...

Engineering Economy [EXP-20136]

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 this company if your MARR is 15% per year? (all sections).

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Find the IRR:
0 = −$200,000 (P/A, $\acute{i}$ , 3) + $50,000 (P/F, $\acute{i}$ , 4) + $250,000 (P/A, $\acute{i}$ , 5)(P/F, $\acute{i}$ , 4)
By trial and error, $\acute{i}$ = 17.65%, which is greater than the MARR. As a matter of interest, the PW(15%) = $51,094. 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).

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