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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.)

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