Question

A manufacturer of video games develops a new game over two years. This costs $830,000 per year with one payment made immediately and the other at the end of two years. When the game is released, it is expected to make $1.00 million per year for three years after that. What is the net present value (NPV) of this decision if the cost of capital is 8%? A. $1,268,923 B. $734,639 C. $1,068,567 D. $667,854

Answer 1

Cost for developing game first incurred today = $830,000

while other Occurred at the end of year 2 for = $830,000

In 3 rd year, the game is relaesed and expected 3 cash flows of $1000,000 each year.

Calculating the NPV of the project:-

Year	Cash Flows of Project ($ )	PV Factor @8%	Present Value of Project ($)
0	(830,000.00)	1.0000	(830,000.00)
2	(830,000.00)	0.8573	(711,591.22)
3	1,000,000.00	0.7938	793,832.24
4	1,000,000.00	0.7350	735,029.85
5	1,000,000.00	0.6806	680,583.20
5	-	0.6806	-
			667,854.07

So, NPV is 4667,854.07

Option D

If you need any clarification, you can ask in comments.     

If you like my answer, then please up-vote as it will be motivating