The NPV of a new video game, Petty Larceny 1, is -$2M 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 $12M to start Petty Larceny 2, which will produce a one-time cash flow of $16M in year 3. The firm's cost of capital is 12% and the risk-free rate is 4%. Estimated volatility for the project is 35%. What is the Petty Larceny 1 NPV with the follow-on investment option? ○ -$1.35 M ○ $0.00 M ○ $0.35 M ○ $2.65 M
The NPV of a new video game, Petty Larceny 1, is -$2M 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 $12M to start Petty Larceny 2, which will produce a one-time cash flow of $16M in year 3. The firm's cost of capital is 12% and the risk-free rate is 4%. Estimated volatility for the project is 35%. What is the Petty Larceny 1 NPV with the follow-on investment option? ○ -$1.35 M ○ $0.00 M ○ $0.35 M ○ $2.65 M
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:The NPV of a new video game, Petty Larceny 1, is -$2M 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 $12M to start Petty Larceny 2, which will
produce a one-time cash flow of $16M in year 3. The firm's cost of capital is 12% and the
risk-free rate is 4%. Estimated volatility for the project is 35%. What is the Petty Larceny 1
NPV with the follow-on investment option?
○ -$1.35 M
○ $0.00 M
○ $0.35 M
○ $2.65 M
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