Case Study: Feasibility Study of a New Game Project for M$.$V$.$P Games Inc. Introduction: M$.$V$.$P Games Inc. is considering launching a new game that requires an initial investment of $$7$ million. The company expects annual operating cash flows of $$1\mathrm{.}3$ million for the next seven years. The relevant discount rate for the project is $10\%,$ and cash flows are expected to occur at the end of each year. The company has hired you to perform a feasibility study to determine whether the project should be accepted and to evaluate the impact of potential changes in cash flows and strategic decisions, such as abandonment or expansion. Objective: The objective of this case study is to compute the base Net Present Value $($NPV$)$ with$/$without Real options of the project and evaluate different scenarios based on the likelihood of success and failure. The scenarios include the potential for revising future cash flows, the option to abandon the project after one year, and the possibility of expanding the project if successful. Tasks: $1.$ Compute the base NPV for this project and decide whether the project should be accepted or not? Assume that the Cashflows will remain constant for next seven years. $2.$ Scenario Analysis: Revised Cash Flow Estimates After Year $1$ After realizing the cash flow in the first year, M$.$V$.$P will revise the estimates of the remaining annual cash flows. If the project is successful, the annual cash flows will be revised upward to $$2\mathrm{.}2$ million; if the project fails, the annual cash flows will be revised downward to $$285,000.$ The probability of success or failure is assumed to be equally likely $(50\%).2\mathrm{.}1.$ NPV without the Option to Expand or Abandon: Suppose the success and failure are equally likely, what is the NPV of the project if there is no option to expand or abandon? $2\mathrm{.}2.$ NPV with the Option to Abandon $($Real option$)$: Suppose if there is an option to abandon the project at the end of year $1$ for $3$ million, compute the NPV and value of option to abandon? $2\mathrm{.}3.$ Option to Expand: Suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion will be desirable only if the project were a success. This implies that if the project is a success, projected sales after expansion will be $4\mathrm{.}4$ m $$.$ Again, assuming that success and failure are equally likely, what is the NPV of the project? What is the value of the option to expand?