M.V.P. Games has hired you to perform a feasibility study of a new video game that requires
Question:
M.V.P. Games has hired you to perform a feasibility study of a new video game that requires a $9 million initial investment. M.V.P. expects a total annual operating cash flow of $1,750,000 for the next 10 years. The relevant discount rate is 12 per cent. 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 $2.5 million or downward to $520,000. Each revision has an equal probability of occurring. At that time, the video game project can be sold for $2,000,000. What is the revised NPV given that the firm can abandon the project after one year?
Step by Step Answer:
Corporate Finance
ISBN: 9780077173630
3rd Edition
Authors: David Hillier, Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan, Jeffrey F. Jaffe