Abandonment Decisions M.V.P. Games, Inc., has hired you to perform a feasibility study of a new video game that requires a $5 million initial investment. M.V.P. expects a total annual operating cash flow of $880,000 for the next 10 years. The relevant discount rate is 10 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 be revised either upward to $1.75 million or downward to $290,000. Each revision has an equal probability of occurring. At that time, the video game project can be sold for $1,300,000. What is the revised NPV given that the firm can abandon the project after one year?
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