Abandonment Decisions M.V.P. Games, Inc., has hired you to perform a feasibility study of a new video game that requires a $4 million initial investment. M.V.P. expects a total annual operating cash flow of $750,000 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

$1.5 million or downward to $120,000. Each revision has an equal probability of occurring.

At that time, the video game project can be sold for $800,000. What is the revised NPV given that the firm can abandon the project after one year?

 LO.1