Question
The NPV of a new video game, Petty Larceny 1, is -$1.5M after discounting all expected cash flows. However, if high demand in the market
The NPV of a new video game, Petty Larceny 1, is -$1.5M after discounting all expected cash flows. However, if high demand in the market evolves, Petty Larceny 2 is a possible follow-on opportunity in two years. In Year 2 it will cost $10M to start Petty Larceny 2, which will produce a one-time cash flow of $12M in year 3. The firms cost of capital is 10% and the risk-free rate is 5%. Estimated volatility for the project is 30%. What is the Petty Larceny 1 NPV with the follow-on investment option?
Group of answer choices
-$1.50 M
$0.00 M
$0.87 M
$2.37 M
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