None The NPV of a new video game, Petty Larceny 1, is -$2M after discounting all expected cashflows. However, if high demand in the market evolves, Petty Larceny 2 is a possible follow-onopportunity in two years. In Year 2 it will cost $12M to start Petty Larceny 2, which willproduce a one-time cash flow of $16M in year 3. The firm's cost of capital is 12% and therisk-free rate is 4%. Estimated volatility for the project is 35%. What is the Petty Larceny 1NPV with the follow-on investment option?○ -$1.35 M○ $0.00 M○ $0.35 M○ $2.65 M

To calculate the NPV of Petty Larceny 1 with the follow-on investment option (Petty Larceny 2), we…

Answered: The NPV of a new video game, Petty…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter14: Real Options

Section: Chapter Questions

Problem 4MC

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The NPV of a new video game, Petty Larceny 1, is -$1.5M 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 $10M to start Petty Larceny 2, which will produce a one-time cash flow of $12M in year 3. The firm’s cost of capital is 10% and the risk-free rate is 5%. Estimated volatility for the project is 30%. What is the Petty Larceny 1 NPV with the follow-on investment option? Group of answer choices -$1.50 M $0.00 M $0.87 M $2.37 M
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