Question

Problem: Plastics Recycling Business Case

While I was running my plastics recycling business, I needed to raise $500,000 for some immediate upgrades. Since this is new to me and my credit rating was not excellent at that point, I decided to approach a local venture capitalist rather than a local bank. I offered the venture capitalist to pay $100,000 at the end of each year for 10 years starting from Year 1 after I received the money. I soon realized that the venture capitalist normally does not use his money and he makes deals with the local banks. Since his credit rating is excellent, he has persuaded the bank to loan him $300,000 for which he will pay $50,000 at the end of each year for 10 years starting from Year 1 from the issuance of the loan. It means the venture capitalist used $200,000 of his money to help me with the $500,000 loan. The venture capitalist charges the 18% interest rate on my loan. The bank charges the 10% interest rate on the loan to the venture capitalist.

Part 1: Venture Capitalist (VC)

(a) Create the Cash Flow 1 for VC, who lends $500,000 to me.

(b) Calculate the NPV for the Cash Flow 1.

(c) Create the Cash Flow 2 for VC, who borrows $300,000 from the bank.

(d) Calculate the NPV for the Cash Flow 2.

(e) Calculate the final NPV for VC.

(f) Explain whether this investment is a good deal for VC using the (e) result. If yes, why? If no, why not?

Part 2: Bank

(a) Create the Cash Flow for the bank.

(b) Calculate the NPV.

(c) Explain whether this investment is a good deal for the Bank using the (b) result. If yes, why? If no, why not?

Part 3: Me

(a) Create the Cash Flow for me.

(b) Calculate the NPV. (c) Explain whether this investment is a good deal for me using the (b) result. If yes, why? If no, why not?

Answer 1