1 answer

A manufacturer of video games develops a new game over two years. This costs $820,000 per...

Question:

A manufacturer of video games develops a new game over two years. This costs $820,000 per year with one payment made immediat

A manufacturer of video games develops a new game over two years. This costs $820,000 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 $1.30 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. $1,349,261 B. $2,563,596 C. $2,158,818 O D. $1,484,187

Answers

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=1,300,000/1.08^3+1,300,000/1.08^4+1,300,000/1.08^5

=2872278.88

Present value of outflows=820,000+820,000/1.08^2

=1523017.83

NPV=Present value of inflows-Present value of outflows

=2872278.88-1523017.83

=$1349261(Approx)

.

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