An angel investor is considering investing in one of two start-up businesses and

ID: 1187743 • Letter: A

Question

An angel investor is considering investing in one of two

start-up businesses and is evaluating the expected returns along

with the risk of each option in order to choose the better

alternative.

Business 1 is an innovative protein energy drink, which has ENPV

of $100,000 with a standard deviation of $40,000.

Business 2 is a unique chicken wings dipping sauce with an ENPV

of $60,000 and a standard deviation of $25,000.

a) Apply the coefficient-of-variation decision criterion to

these alternatives to find out which is preferred by the angel

investor, assuming that he/she is risk-averse.

b) Apply the maximin criterion, assuming that the worst outcome

in Business 1 is to lose $5,000, whereas the worst outcome in

Business 2 is to make only $5,000 in profit.

c) If you were the angel investor, what is your certainty

equivalent for these two projects? Are you risk averse,

risk-neutral, or risk-lover

1) NPV= $ 5.5 mln( 1+0.06)+ $ 5.5 mln (1+0.06)^2 = $ 10.08 mln

2 nd alternative is better since Net present value of it is more the $ 10 mln ( 10.08 >10 ) mln $

since value of money depreciate over time but in this case NPV in 2nd alternative is more hence preferred

2) when when r =0.12

NPV= $ 5.5 mln( 1+0.12)+ $ 5.5 mln (1+0.12)^2 = $ 9.29 mln

in this case NPV is less than $ 10 mln hence $ 10 mln lump sump is profitable

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