What is the npv of the project

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The media production company, TVflix, produces sitcoms for broadcast television in U.S. The company is considering the project of creating a Chinese version of sitcoms to export them in China, which requires a $120 million investment today. If TVflix invests today, the company will find out whether it is successful in one year. If the project succeeds, it will generate $10 million per year in perpetuity starting in the first year. Otherwise, the project will generate $1 million per year in perpetuity starting in the first year. The analyst in TVflix believes that there is a 60% chance that the project will be successful. The cost of capital for this project is 7%. Answer questions (a) through (c) accordingly.

a) What is the NPV of the project?

b) Assume that TVflix has a choice to invest additional $80 million in year 1 to export the sitcoms to the rest of East Asia, only if the project succeeds in China. The company believes that the additional investment will generate additional $10 million per year in perpetuity beginning in year two. What is the NPV of the project in the option to expand?

c) What is the value of the option to expand?

Reference no: EM132410932

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