Chapter 05 Questions and Problems

Chapter 05 Questions and Problems - ENTREPRENEURIAL...

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E NTREPRENEURIAL F INANCE : Strategy Valuation and Deal Structure Chapter 5. Developing Business Strategy Using Simulation Questions and Problems Note: You should be familiar with using Venture.SIM or another Excel simulation add-in (@RISK or Crystal Ball) before attempting these problems. 1. SIM A new venture requires $15,000 per month during their prototype development stage. Development time is represented by a triangular distribution with minimum, most likely, and maximum values of 2, 10, and 24 months. How much funding should the entrepreneur raise if he wants to have sufficient capital to meet 75% of the development outcomes? 2. SIM Cool Rinks builds and operates outdoor ice skating facilities. They are in the process of evaluating expansion opportunities. a. The first option is a new location in Indiana. For the business to be profitable, the average daily temperature needs to be below 32 ° more than 75% of the time during the 90-day skating season. At the site being considered, the average daily temperature during the season is normally distributed with a mean of 25 ° and a standard deviation of 11 ° . Is Indiana a promising market for Cool Rinks? b. Now assume Cool Rinks has a second location under consideration in Utah. It is colder, with the average daily temperature during the season normally distributed with a mean of 14 ° and a standard deviation of 10 ° . In addition to the 32 ° requirement, the company projects that a site will not be profitable if more than 40% of the days have an average temperature below 10 ° . How does the Utah site compare to Indiana as a potential location for a new rink? 3. SIM You are planning a new restaurant and have located a site which will accommodate seating and parking for 400 customers. Nightly demand is estimated by a triangular distribution with minimum, most likely, and maximum values of 75, 300, and 600. Estimate what percentage of the time this site will be sufficient to meet demand. 4. SIM You have spent the last six months developing a new product for treatment of arthritis. You believe a breakthrough could occur at any time during the next eight months and that the probability of success in any given month is about 10 percent. If you do not succeed within that period, you have decided to abandon the project. In the event that your efforts are successful, the clinical testing required for FDA approval will take six to ten additional months from the time of development success. Based on prior experience, if development efforts are successful, there is an 80 percent probability that approval will be granted. Notice of approval or disapproval in any month is equally likely. During development, your venture has been consuming cash at an average rate of $30,000 per month. You estimate that in any given month there is a 30 percent probability that the cost will be only $20,000 and a 20 percent probability that it will be $45,000. The cost of financing the venture will be much lower once FDA
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This note was uploaded on 02/19/2012 for the course FIN 124 taught by Professor Jackson during the Spring '05 term at University of Texas at Dallas, Richardson.

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Chapter 05 Questions and Problems - ENTREPRENEURIAL...

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