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 [i.e., at t=1]). If it fails, 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 O O O $0.00 -$5.15 $24.63 $19.48

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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13
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 [i.e., at t= 1]). If it fails, 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
Transcribed Image Text:13 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 [i.e., at t= 1]). If it fails, 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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