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You are planning to produce a new action figure called "Hillary". However, you are very uncertain...

You are planning to produce a new action figure called "Hillary". However, you are very uncertain about the demand for the product. If it is a hit, you will have net cash flows of $60 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 $10 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%). 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 have to spend $90 million immediately for equipment and the rights to produce the figure. If you can sell your equipment for $60 million once the first year's cash flows are received, calculate the value of the abandonment option. (The discount rate is 10%.)

Could someone give a step by step, this is for Finance

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jeff jeffy answered 2 years ago
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