M.V.P. Games, Inc., has hired you to perform a feasibility study of a new video game that requires an initial investment of $8.9 million. The company expects a total annual operating cash flow of $1.6 million for the next 10 years.

The relevant discount rate is 10 percent. Cash flows occur at year-end.

a. What is the NPV of the new video game?

b. After one year, the estimate of remaining annual cash flows will be revised either upward to $2.81 million or downward to $385,000. Each revision has an equal probability of occurring. At that time, the video game project can be sold for $2.9 million.

What is the revised NPV given that the firm can abandon the project after one year?