The NPV of a new video game, Dexa 1, is −1.5 million after discounting all expected cash flows from the Dexa 1 game itself. However, if high demand in the market evolves, Dexa 2 is a possible sequel opportunity in two years. In two years it will cost 10 million to start Dexa 2, which will produce 9 million of expected but uncertain cash flow in year 2. Suppose the uncertainty is such that N(d1) = 0.5785 and N(d2) = 0.1755. The annual risk-free interest rate is 11 percent. What is the adjusted present value of Dexa 1, inclusive of the option value of the sequel?

Answer rating: 100% (QA)

To calculate the adjusted present value APV of Dexa 1 inclusive of the option value of the sequel De... View the full answer