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You Are Planning to Produce a New Action Figure Called

question 33

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 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 you can sell your equipment for $60 million once the first year's cash flows are received, calculate the value of the abandonment option. (The discount rate is 10 percent.)

Definitions:

Nitrogenous Base

An organic molecule that makes up the building blocks of nucleic acids, such as DNA and RNA, including adenine, thymine, guanine, cytosine, and uracil.

Nucleic Acids

Complex organic substances that constitute the genetic material of living cells; DNA and RNA.

Nitrogen

A chemical element with the symbol N and atomic number 7, essential for all living organisms as it makes up a part of all proteins and nucleic acids.

DNA Polymerase

An enzyme that catalyzes the synthesis of DNA molecules from deoxyribonucleotides, the building blocks of DNA.