If venture investors invest $1,000,000 now, will receive 25% of the exit value, and expect a 20% compounded rate of return on their investment, what is the approximate expected exit value at the end of five years?

Question

Quizplus · Accepted Answer

To achieve a 20% compounded rate of return over five years on a $1,000,000 investment, the future value (FV) can be calculated using the formula FV = PV(1 + r)^n, where PV is the present value ($1,000,000), r is the annual interest rate (20% or 0.20), and n is the number of years (5). This gives FV = $1,000,000 * (1 + 0.20)^5 = $2,488,320. Since the investors receive 25% of the exit value, and $2,488,320 represents 25% of the exit value, the total exit value is $2,488,320 / 0.25 = $9,953,280, which is approximately $9,950,000.

If Venture Investors Invest $1,000,000 Now, Will Receive 25% of the Exit