A venture is expected to have an exit value of $10,000,000 two years from now. If venture investors invest $2,000,000 now, and expect a 20% compounded rate of return on their investment, what portion of the exit value would they need?

Question

Quizplus · Accepted Answer

First, we need to calculate the future value of the investment after 2 years with 20% compounded annually:

FV = PV x (1 + r)t
FV = 2,000,000 x (1 + 0.20)2
FV = 2,000,000 x 1.44
FV = 2,880,000

So the investment will have a future value of $2,880,000 after 2 years.

Now we need to calculate the portion of the exit value that the investors need to achieve a 20% rate of return on their investment:

Exit Value = FV / (1 + r)t
Exit Value = 2,880,000 / (1 + 0.20)2
Exit Value = 2,880,000 / 1.44
Exit Value = 2,000,000

Therefore, the investors need to receive $2,000,000 of the exit value to achieve a 20% rate of return on their investment.

Finally, we can calculate the portion of the exit value that represents $2,000,000:

Portion of Exit Value = $2,000,000 / $10,000,000
Portion of Exit Value = 0.2 or 20%

So the answer is (D) 28.8%.

A Venture Is Expected to Have an Exit Value of $10,000,000