What is the npv of new video game

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Question 1: Real Option

Abandonment Decisions: First Games, Inc., has hired you to perform a feasibility study of a new video game that requires an initial investment of $3.7million. The company expects a total annual operating cash flow of $600,000 for the next 10 years. The relevant discount rate is 11% Cash flow occur at year-end.

(a) What is the NPV of new Video game?

(b) After one year, the estimate of remaining annual cash flow will either be revised upward to $940,000 or revised downward to $340,000. Each revision has an equal probability of occuring. At the time, the video game project can be sold for $2.46million after taxes. What is the revised NPV given that the firm can abondon the project after one year?

Reference no: EM132775848

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