Estimate of remaining cash flows will be revised

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ACME has hired you to study the feasibility of a new toy that requires a $5 million initial investment. ACME expects annual cash flows of $880,000 for the next 10 years. The discount rate is 10%. a. What is the NPV of the new toy? b. After one year, the estimate of remaining cash flows will be revised either upward to $1.75 million or downward to $290,000. Each revision has an equal probability of occurring. At that time, the toy project can be sold for $1,300,000. What is the revised NPV given that the firm can abandon the project after one year?

Reference no: EM13950198

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