Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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The NPV of a new video game, Petty Larceny 1, is -$2M after discounting all expected cash flows. However, if high demand in the market evolves, Petty Larceny 2 is a possible follow-on opportunity in two years. In Year 2 it will cost $12M to start Petty Larceny 2, which will produce a one-time cash flow of $16M in year 3. The firm's cost of capital is 12% and the risk-free rate is 4%. Estimated volatility for the project is 35%. What is the Petty Larceny 1 NPV with the follow-on investment option? ○ -$1.35 M ○ $0.00 M ○ $0.35 M ○ $2.65 M
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Transcribed Image Text:The NPV of a new video game, Petty Larceny 1, is -$2M after discounting all expected cash flows. However, if high demand in the market evolves, Petty Larceny 2 is a possible follow-on opportunity in two years. In Year 2 it will cost $12M to start Petty Larceny 2, which will produce a one-time cash flow of $16M in year 3. The firm's cost of capital is 12% and the risk-free rate is 4%. Estimated volatility for the project is 35%. What is the Petty Larceny 1 NPV with the follow-on investment option? ○ -$1.35 M ○ $0.00 M ○ $0.35 M ○ $2.65 M
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