Flex Technology Case Study

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FLEX TECHNOLOGY ASSIGNMENT

1. Ignoring the option to sell to BioDevice in year two, at what price do you value the project?

From the venture capitalist perspective, I would use the same valuation as the financial consulting firm of $530,539 at a 70% discount rate. Because this investment is just starting out, it is in the “seed and startup” stage of development, which requires between a 50% and 100% required rate of return in order to account for the vast amount of unknown risk as well as the expertise that the investors will be able to provide for the project. As the developer, Krause is certainly very optimistic about his investment; the higher rate of return I would expect accounts for all of the unknowns regarding the bias of cash flow presented by Krause.

2. How does the option to sell in year two change your analysis? Can you estimate what percentage of the time he will exercise this option?

The option to sell in year two lowers the risk of the investment because we will be able to see how successful the project is within the first year, and we might be able to recover some loss if the project is not as successful as initially anticipated. However, I still feel that it would fall within the recommended range of the initial stages of development, but on the lower range of required rate of returns (50%). Using a discount rate of 50%, the project would now be valued at $1,331,678. With this discount rate, the project is only 27% likely to be worth more than Krause’s initial investment after taxes ($1 Million). This suggests that Krause would take a loss 73% of the time, and thus sell at that probability.

3. Which inputs have the most impact on these two valuations?

Looking at the tornado diagram of correlation coefficients after running simulation, The top drivers of risk are market share…...

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