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M.V.P. Games, Inc., has hired you to perform a feasibility study of a new video game...

M.V.P. Games, Inc., has hired you to perform a feasibility study of a new video game that requires an initial investment of $8 million. The company expects a total annual operating cash flow of $1.4 million for the next 10 years. The relevant discount rate is 10 percent. Cash flows occur at year-end.
a.

What is the NPV of the new video game?
b.

After one year, the estimate of remaining annual cash flows will be revised either upward to $2.3 million or downward to $295,000. Each revision has an equal probability of occurring. At that time, the video game project can be sold for $2.7 million. What is the revised NPV given that the firm can abandon the project after one year?

Solutions

Expert Solution

A VERY GOOD SUM ON ABANDONMENT FROM CORPORATE FINANCE BY ROSS

jeff jeffy answered 4 months ago
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