You Are Planning to Produce a New Action Figure Called

question 60

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 value of the abandonment option. (The discount rate is 10%)

• A) -9.15
• B) +13.99
• C) +23.14
• D) None of the above

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Bottlenecks or drawbacks that may impede progress or success.

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