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An NPV result greater than zero means that you will exceed the required
rate-of-return (you will exceed the "hurdle rate"), which
means the investment is acceptable.
Example: A seed investor is considering investing in a startup company.
Given the current market conditions, the seed investor chooses to use
a hurdle rate between 50% to 100% to compensate for risk. The seed investor
considers 2M shares for investing $2M in the startup after determining
that the 2M shares will have a potential market value of $37.5/share
(less tax) in 5 years. To determine if the seed investor will accept
or reject this offering, enter the following numbers below into the
calculator above:
Hurdle rate: 0.5
Initial Investment: -2000000 ($2M investment, enter as negative number)
Year End 1 through Year End 4 cash flows = 0 (no shares sold until
year 5)
Year End 5 cash flow 60000000 (2M shares x ($37.5/share - $7.5/share
tax))
Result at 0.5 hurdle rate = 5901234 (Accept)
Hurdle rate: 1.0
Initial Investment: -2000000 ($2M investment, enter as negative number)
Year End 1 through Year End 4 cash flows = 0 (no shares sold until
year 5)
Year End 5 cash flow 60000000 (2M shares x ($37.5/share - $7.5/share
tax))
Result at 1.0 hurdle rate = -125000 (Reject)
So the answer depends on how much risk the investor wants to take.
If the investor is willing to accept a 0.5 hurdle rate, then the investment
is worthwhile. However, if the investor will only accept a 1.0 hurdle
rate, the investment would be rejected. Startups can lower the risk
to investors through establishing a solid management team, identifying
intellectual property, forming strategic alliances, having a customer
base, etc...
You try it! Remember use no dollar signs or commas, and use a negative
sign for the Initial Investment and use a positive number for money
earned.
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