AVP. Games, Inc., has hired you to perform a feasibility study of a new video game that equires an Initial investment of $9.5 million. The company expects a total annual operating cash flow of $18 million for the next 10 years. The relevant discount rate is 10 percent. Cash flows occur at year-end. a. What is the NPV of the new video game? (Do not round intermediate calculations and enter your answer in dollers, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) b. After one year, the estimate of remaining annual cash flows will be revised either upward to $2.95 million or downward to $395.000. Each revision has an equal probability of occurring. At that time, the video game project can be sold for $31 million. What is the revised NPV given that the firm can abandon the project after one year? (Do not round intermediate calculetions and enter your answer in dollars, not millions of dollers, rounded to 2 decimal pleces, e.g., 1,234,567.09.)
AVP. Games, Inc., has hired you to perform a feasibility study of a new video game that equires an Initial investment of $9.5 million. The company expects a total annual operating cash flow of $18 million for the next 10 years. The relevant discount rate is 10 percent. Cash flows occur at year-end. a. What is the NPV of the new video game? (Do not round intermediate calculations and enter your answer in dollers, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) b. After one year, the estimate of remaining annual cash flows will be revised either upward to $2.95 million or downward to $395.000. Each revision has an equal probability of occurring. At that time, the video game project can be sold for $31 million. What is the revised NPV given that the firm can abandon the project after one year? (Do not round intermediate calculetions and enter your answer in dollars, not millions of dollers, rounded to 2 decimal pleces, e.g., 1,234,567.09.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:M.V.P. Games, Inc., has hired you to perform a feasibility study of a new video game that
requires an Initial investment of $9.5 million. The company expects a total annual
operating cash flow of $1.8 million for the next 10 years. The relevant discount rate is 10
percent. Cash flows occur at year-end.
a. What is the NPV of the new video game? (Do not round intermediate calculations
and enter your answer in dollars, not millions of dollars, rounded to 2 decimal
places, e.g., 1,234,567.89.)
b. After one year, the estimate of remaining annual cash flows will be revised either
upward to $2.95 million or downward to $395.000. Each revision has an equal
probability of occurring. At that time, the video game project can be sold for $3.1
million. What is the revised NPV given that the firm can abandon the project after one
year? (Do not round intermedinte calculetions and enter your answer in dollars, not
millions of dollars, rounded to 2 decimal pleces, eg, 1,234,567.89.)
NPV
b. NPV
a.
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