M Inc asks you to perform a feasibility study of a new video game that requires
ID: 2760075 • Letter: M
Question
M Inc asks you to perform a feasibility study of a new video game that requires an initial investment of $8 million.M Inc. expects a total annual operating cash flow of $1.5 million for the next 10 years. The relevant discount rate is 10 percent. Cash flow occur at year-end. After one year, the estimate of remaining annul cash flows will be revised wither upward to 2.75 million or downward to $345,000. Each revision has an equal probability of occurring. At that time, the video game project van be sold for $3.1 million. What is the revised NPV given that the firm can abandon the project after one year? Please show the work. Thanks.
A. $1,986,863.22
B. $1,971,507.04
C. $1,216,850.66
D. None of the above
Explanation / Answer
At the end of the first year cash inflow = [ (2.75 million * 50%) + (0.345 million *50%)] * 0.909
= [1.375 million + 0.1725 million ] * 0.909 = $ 1,406,677.50
At the end of the first year, the video game project sold, cash inflow = $ 3,100,000 * 0.909 = $ 2,817,900
Total Cash Inflow = $ 1,406,677.50 + $ 2,817,900 = $ 4,224,577.50
Cash outfolw = $ 8,000,000
Therefore, NPV = -$ 8,000,000 + $ 4,224,577.50 = - $ 3,775,422.50
Therefore, the Answer is NONE OF THE ABOVE.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.