Question
Games Unlimited Inc. is considering a new game that would require an after-tax investment of $21.0 million. If the new game is well received, then
Games Unlimited Inc. is considering a new game that would require an after-tax investment of $21.0 million. If the new game is well received, then the project would produce after-tax cash flows of $9.5 million a year for 3 years. However, if the market does not like the new game, then the after-tax cash flows would be only $5.6 million per year. There is a 50% probability of both good and bad market conditions. The firm could delay the project for a year while it conducts a test to determine if demand would be strong or weak. The project's after-tax cost and expected annual after-tax cash flows would be the same whether the project is delayed or not. If the WACC is 8.4%, what is the value (in thousands) of the investment timing option? Do not round intermediate calculations.
a. $712
b. $1,653
c. $1,525
d. $1,682
e. $3,051
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