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Terminal Value/Present Value

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The prospective founder of a new restaurant wants to determine the present value (some might call it the pre-money) of his project. The restaurant is in the development stage but hopes to "begin" operations early next year. Project cash flows from the founder's pro forma financial statements (Balance Sheets, Income Statements & Statements of Cash flows), and AFN calculations, are expected to be as follows: Year 1 = -$250,000, Year 2 = - $150,000, Year 3 = 0, Year 4 = $2 million, and Year 5 = $4 million. Cash inflows are expected to be $4.16 million in Year 6 and are expected to grow at a 4 percent annual rate thereafter. Assume that the typical rate of rate of return in this industry for an established restaurant into its maturity (TERMINAL) phase is 20%.

A. What is the value of the restaurant's expected Terminal Cash Flows (TCFs) at the end of the five (5) year explicit forecasting period?

B. What Present Value of the restaurant's cash flows would be used to value the venture for Day 1 (TODAY) investment purposes? (assume a 50% discount rate)

C. What percentage (%) of the restaurant's equity will the founder probably have to give up to attract $1,200,000 in development stage investment funds?

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