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You are planning to produce a new action figure called Nia. However, you are very uncertain about the demand for the product. If it is

You are planning to produce a new action figure called "Nia." However, you are very uncertain about the demand for the product. If it is a hit, you will have net cash flows of $86 million per year for three years (starting next year [l.e., at t=1). If it falls, you will only have net cash flows of $46 million per year for two years (also starting next year). There is an equal chance that it will be a hit or failure (probability =50 percent). You will not know whether it is a hit or a failure until the first year's cash flows are in (i.e., at t=1). You must spend $152 million immediately for equipment and the rights to produce the figure. If you can sell your equipment for $96 million once the first year's cash flows are received, calculate the value of the abandonment option. (The discount rate is 10 percent.)
Multiple Choice
$0.00
-$5.15
$24.63
$19.48
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