You Are Planning to Produce a New Action Figure Called

question 35

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 3 years (starting next year) . If it fails, you will only have net cash flows of
$10 million per year for 2 years (starting next year) . There is an equal chance that it will be a hit or failure (probability = 50%) . 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 the discount rate is 10%, calculate the NPV without the abandonment option.

• A) -9.15
• B) +13.99
• C) +9.15
• D) -14.4

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Definitions:

Salary Expense

Salary expense is the cost incurred by a business to compensate its employees, including wages, salaries, and other forms of compensation.

Cash Paid

The total amount of cash disbursed by a company for various purposes, including operating expenses, investing activities, and financing activities.

Operating Activities

Activities that constitute the primary or main activities of an organization, such as production, sales, and distribution.

Direct Method

A way of preparing the cash flow statement where actual cash flow information from the company's operations is used, directly showing major classes of gross cash receipts and payments.