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You Are Planning to Produce a New Action Figure Called

question 5

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

Definitions:

Airflow

The movement of air around or through an object, which is critical in various applications, including cooling electronic devices and aerodynamics for vehicles.

Engine

A machine designed to convert various forms of energy into mechanical force and motion, powering vehicles and other equipment.

Usable Power

The portion of power or energy that can be effectively used or delivered by a system without including losses or reserves.

Crankshaft

A mechanical part which translates the linear motion of pistons into rotational motion, fundamental to the functioning of an internal combustion engine.