You Are Planning to Produce a New Action Figure Called

question 52

Multiple Choice

You are planning to produce a new action figure called "Hillary". However, you are very uncertain about the demand for the product. If it is a hit, you will have net cash flows of $50 million per year for three years (starting next year [i.e., at t = 1]) . If it fails, you will only have net cash flows of $10 million per year for two years (also starting next year) . There is an equal chance that it will be a hit or failure (probability = 50 percent) . You will not know whether it is a hit or a failure until after the first year's cash flows are in . You have to spend $80 million immediately for equipment and the rights to produce the figure. If the discount rate is 10 percent, calculate Hillary's NPV.

• A)−9.15
• B)+13.99
• C)+5.15
• D)−14.40

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Definitions:

Interest Rate

The percentage at which interest is charged or paid on a loan or investment over a specific period.

Future Value

The estimated value of an investment at a specified date in the future, given a certain rate of interest or rate of return.

Annuity Factor

A factor used to calculate the present value of an annuity, representing the number of payment periods.

Compound Interest

The interest computed on the principal and any interest earned that has not been paid or withdrawn.