Abandonment Decisions M.V.P. Games, Inc., has hired you to perform a feasibility study of a new video game that requires an initial investment of $8 million. M.V.P. expects a total annual operating cash flow of $1.5 million 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 $2.75 million or downward to $345,000. Each revision has an equal probability of occurring. At that time, the video game project can be sold for $3.1 million. What is the revised NPV given that the firm can abandon the project after one year?