First Person Games, Inc., has hired you to perform a feasibility study of a new video game
Question:
First Person Games, Inc., has hired you to perform a feasibility study of a new video game that requires an initial investment of $4.8 million. The company expects a total annual operating cash flow of $780,000 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?
b. After one year, the estimate of remaining annual cash flows will either be revised upward to $1.26 million or revised downward to $360,000. Each revision has an equal probability of occurring. At that time, the video game project can be sold for $2.46 million. What is the revised NPV given that the firm can abandon the project after one year?
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
Step by Step Answer:
Corporate Finance Core Principles and Applications
ISBN: 978-1259289903
5th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan