# Question

M.V.P. Games, Inc., has hired you to perform a feasibility study of a new video game that requires a $7 million initial investment. M.V.P. expects a total annual operating cash flow of $1.3 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 $2.2 million or downward to $285,000. Each revision has an equal probability of occurring. At that time, the video game project can be sold for $2.6 million. What is the revised NPV given that the firm can abandon the project after one year?

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 $2.2 million or downward to $285,000. Each revision has an equal probability of occurring. At that time, the video game project can be sold for $2.6 million. What is the revised NPV given that the firm can abandon the project after one year?

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