Corporate Finance: **Kindly provide workings and clear answers.

Question 1: Real option

Abandonment Decisions: First Games, Inc., has hired you to perform a feasibility study of a new video game that requires an initial investment of $3.7million.

The company expects a total annual operating cash flow of $600,000 for the next 10 years.

The relevant discount rate is 11%. Cash flow occurs at year-end.

(a) What is the NPV of the new Video game?

(b) After one year, the estimate of remaining annual cash flow will either be revised upward to $940,000 or revised downward to $340,000.

Each revision has an equal probability of occurring.

At the time, the video game project can be sold for $2.46million after taxes.

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