Question

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 5 years?
a. 1,000,000
b. 2,490,000
c. 4,980,000
d. 7,470,000
e. 9,950,000
please show all work. thanks!

Answer 1

Given,

Investment = $1000000

Receive rate = 25% or 0.25

Rate of return (r) = 20% or 0.20

No. of years (n) = 5 years

Solution :-

Expected exit value = Investment (1 + r)ⁿ receive rate

= $1000000 (1 + 0.20)⁵ 0.25

= $1000000 (1.20)⁵ 0.25

= $1000000 (2.49) 0.25

= $2490000 0.25 = $9960000

Thus, approximate expected exit value at the end of 5 years is $9960000