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

Question

M.V.P. Games, Inc., has hired you to perform a feasibility study of a new video game that requires a $7.5 million initial investment. M.V.P. expects a total annual operating cash flow of $1.35 million for the next 9 years. The relevant discount rate is 9 percent. Cash flows occur at year-end. (Do not round intermediate calculations.)

What is the NPV of the new video game? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Round your final answer to 2 decimal places. (e.g., 32.16))

After one year, the estimate of remaining annual cash flows will be revised either upward to $2.25 million or downward to $290,000. Each revision has an equal probability of occurring. At that time, the video game project can be sold for $2.65 million. What is the revised NPV given that the firm can abandon the project after one year? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Round your final answer to 2 decimal places. (e.g., 32.16))

What is the NPV of the new video game? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Round your final answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Calculation of NPV of the video Games Year Cash Flow Discount Rate Net Cash Flow 0 -7.5 1 -7.5 1 1.35 0.917431 1.238532 2 1.35 0.84168 1.136268 3 1.35 0.772183 1.042448 4 1.35 0.708425 0.956374 5 1.35 0.649931 0.877407 6 1.35 0.596267 0.804961 7 1.35 0.547034 0.738496 8 1.35 0.501866 0.677519 9 1.35 0.460428 0.621578 Net Present Value 0.593583 Net Present Value is $ 593583

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