First Person Games, Inc., has hired you to perform a feasibility study of a new video game

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First Person Games, Inc., has hired you to perform a feasibility study of a new video game that requires an initial investment of $3.7 million. The company expects a total annual operating cash flow of $600,000 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 $940,000 or revised downward to $340,000. Each revision has an equal probability of occurring. At that time, the video game project can be sold for $2.46 million after taxes. What is the revised NPV given that the firm can abandon the project after one year?

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Corporate Finance Core Principles And Applications

ISBN: 9781260571127

6th Edition

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan

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