1)Microsoft has just developed the new Xbox, and it must now decide whether to proceed with production. If it does, Microsoft would have to invest $700 million in new PP&E immediately. If the Xbox is successful, Microsoft will earn net cash profits of $350 million annually. If the Xbox fails, it will lose $200 million annually. The outcomes are equally likely. If the required rate of return is assumed constant at 10%, would Microsoft decide to proceed with the production?*

A. Yes.

B. No.

2)Now suppose there is bad news to Microsoft's Xbox that its main rival, the new PlayStation, has been receiving more favorable feedback from the market due to its exclusive game contents. This has reduced expectation for the successful outcome of the new Xbox to 45%. Would Microsoft still decide to proceed with the production?

A. Yes.

B. No.

3)Now, what happens to Microsoft's decision if the discount rate rises to 13%?*

A. Still proceed with the production of the new Xbox.

B. Reconsider the production.

4) To increase the chance of success of the new Xbox(assuming the required rate of return is still 10%)., Microsoft decides to spend approximately $300 million right now to buy some game studios with best selling games to make them exclusive to the new Xbox. This plan is expected to increase the success outcome probability of the new Xbox to 60%. With this new plan included, should Microsoft decide to proceed with the production of the new Xbox?*

A. Yes.

B. No.

5) Following up to question #4, what is the updated NPV of the new Xbox project, with the new plan included?