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 $7.1 million. The company expects a total annual operating cash flow of $1.31 million for the next 10 years. The relevant discount rate is 11 percent. Cash flows occur at year-end.

a.	What is the NPV of the new video game? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

After one year, the estimate of remaining annual cash flows will be revised either upward to $2.21 million or downward to $286,000. Each revision has an equal probability of occurring. At that time, the video game project can be sold for $2.61 million. What is the revised NPV given that the firm can abandon the project after one year? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

Solutions

Expert Solution

a). Solution :- Net present value (NPV) = Present value of cash inflows - Present value of cash outflow.

Present value of cash inflows = 1.31 Million * Cumulative present value factors for 10 years at 11 %(Note 1).

= 1.31 Million * 5.889 (approx)

= $ 7.71459 Million.

Present value of cash outflow = 7.10 Million (Given in the question)

Accordingly, Net present value (NPV) of new video game = 7.71459 Million - 7.10 Million

= $ 0.61459 Million i.e., $ 614590. (1 Million = 1000000, Thus, 0.61459 Million = 0.61459 * 1000000 = $ 6,14,590).

Conclusion :- NPV of new video game = $ 614590.00 (approx).

Note 1 :- Calculation of Cumulative present value factors for 10 years at 11 % :-

Cumulative present value factors for 10 years at 11 %. = [ 1 - (1 + Discount rate)-Time period in years] / Discount rate

= [ 1 - (1 + 0.11)-10 ] / 0.11

= [ 1 - (1.11)-10 ] / 0.11

= (1 - 0.3522) / 0.11

= 0.6478 / 0.11

= 5.889 (approx).

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

16. A developer of video game software has seven proposals for new games. Unfortunately, the company...

16. A developer of video game software has seven proposals for new games. Unfortunately, the company cannot develop all the proposals because its budget for new projects is limited to $950,000, and it has only 20 programmers to assign to new projects. The financial requirements, returns, and the number of programmers required by each project are summarized in the following table. Projects 2 and 6 require specialized programming knowledge that only one of the programmers has. Both of these projects...

A manufacturer of video games develops a new game over two years. This costs $ 810,000...

A manufacturer of video games develops a new game over two years. This costs $ 810,000 per year with one payment made immediately and the other at the end of two years. When the game is? released, it is expected to make $ 1.50 million per year for three years after that. What is the net present value? (NPV) of this decision if the cost of capital is 10%?

Ubisoft is a large manufacturer of video games. The Marketing Manager has hired a consultant to...

Ubisoft is a large manufacturer of video games. The Marketing Manager has hired a consultant to design a survey to determine attitudes towards the products. In addition the percentage of young adults in Quebec owning video games and the average usage rate per week are to be determined. The Marketing Manager wants to be 95% confident of the results and does not want the error to exceed 3 percentage points for video game ownership and 1 hour for average usage...

A manufacturer of video games develops a new game over two years. This costs $820,000 per...

A manufacturer of video games develops a new game over two years. This costs $820,000 per year with one payment made immediately and the other at the end of two years. When the game is released, it is expected to make $1.00 million per year for three years after that. What is the net present value (NPV) of this decision if the cost of capital is 10%?

2. You are designing a puzzle video game that requires fast reaction skills. Note that games...

2. You are designing a puzzle video game that requires fast reaction skills. Note that games such as this can be used in medical settings as methods of psychological and mental assessment, and do not only have uses for entertainment. You are creating a game where players are supposed to do a simple task, but the simple task changes when the background colour of the game changes, which happens unpredictably. There are four possible background colours, where players are told...

2. You are designing a puzzle video game that requires fast reaction skills. Note that games...

Magic Realm, Inc., has developed a new fantasy board game. The company sold 24,600 games last...

Magic Realm, Inc., has developed a new fantasy board game. The company sold 24,600 games last year at a selling price of $68 per game. Fixed expenses associated with the game total $410,000 per year, and variable expenses are $48 per game. Production of the game is entrusted to a printing contractor. Variable expenses consist mostly of payments to this contractor. Required: 1-a. Prepare a contribution format income statement for the game last year. 1-b. Compute the degree of operating...

Magic Realm, Inc., has developed a new fantasy board game. The company sold 35,600 games last...

Magic Realm, Inc., has developed a new fantasy board game. The company sold 35,600 games last year at a selling price of $62 per game. Fixed expenses associated with the game total $623,000 per year, and variable expenses are $42 per game. Production of the game is entrusted to a printing contractor. Variable expenses consist mostly of payments to this contractor. Required: 1-a. Prepare a contribution format income statement for the game last year. 1-b. Compute the degree of operating...

Magic Realm, Inc., has developed a new fantasy board game. The company sold 40,000 games last...

Magic Realm, Inc., has developed a new fantasy board game. The company sold 40,000 games last year at a selling price of $69 per game. Fixed expenses associated with the game total $720,000 per year, and variable expenses are $49 per game. Production of the game is entrusted to a printing contractor. Variable expenses consist mostly of payments to this contractor. Required: 1-a. Prepare a contribution format income statement for the game last year. 1-b. Compute the degree of operating...

Magic Realm, Inc., has developed a new fantasy board game. The company sold 28,200 games last...

Magic Realm, Inc., has developed a new fantasy board game. The company sold 28,200 games last year at a selling price of $70 per game. Fixed expenses associated with the game total $470,000 per year, and variable expenses are $50 per game. Production of the game is entrusted to a printing contractor. Variable expenses consist mostly of payments to this contractor. Required: 1-a. Prepare a contribution format income statement for the game last year. 1-b. Compute the degree of operating...

Subjects