1. Maggie just finished a new movie script. Paramount offers to buy the script for either (a) $500,000 or (b) 2% of the movie's profits.There are two decisions the studio will have to make. The first is to decide if the script is good or bad, and the second if the movie is good or bad. There is an 80% the script is bad. If the script is bad, the studio does nothing. If the script is good, the studio will shot the movie. After the movie is shot, the studio will review it, and there is a 50% the movie is good. If the movie is bad, the movie will not be promoted. If the movie is good, the studio will promote it heavily and the expected profit is $200 million. If the movie is bad, the movie will make 20 million.

Based on your analysis, Maggie should:

A) CHOOSE B

B) INDIFFERENT BETWEEN A AND B

C) CANNOT BE DETERMINED

D) CHOOSE A

1. Hank Inc. is deciding whether to buy a new building. The building will increase cash flows by $5,000,000 per year. The building has a 10-year life and will be obsolete 10 years from today. The building is current priced at $15 million.The cost of the building will decline by $2,500,000 per year until it reaches 5 million, where it remains until it is obsolete. The required rate of return is 10%.

Assuming Hank is willing to wait and risk not being able to acquire the build, how many years from today should they wait to purchase the building to maximize the NPV?

1. 123 Co is considering the launch of a new widget. If the product goes directly to the market, there is a 60% chance of success.For $150,000 the manager can conduct a focus group that will increase the probability of success to 70%.Alternatively, the manager can pay a consulting firm $400,000 to research the market and refine the product.The consulting firm successfully launches new products 75% of the time. If the firm successfully launches the widget, the payoff will be $2 million.If the product is a failure, the NPV is $0.

Q# 1.) Calculate the expected NPV if the managers hire the consulting firm?

Q# 2.) Based on your analysis, 123 should:

1. CANNOT BE DETERMINED
2. HIRE THE CONSULTING FIRM
3. CONDUCT A FOCUS GROUP
4. TAKE THE PRODUCT TO THE MARKT