You Are Planning to Produce a New Action Figure Called

question 53

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%) .You will not know whether it is a hit or a failure until after the first year's cash flows are in,i.e.,at t = 1.You have to spend $80 million immediately for equipment and the rights to produce the figure.If the discount rate is 10%,calculate Hillary's NPV.

• A)-9.15
• B)+13.99
• C)+5.15
• D)-14.4

---

Definitions:

Initial Public Offerings

The first sale of a company's shares to the public, marking a private company's transition to a public company.

Underwriter

A professional or company that evaluates and assumes the risk of another party's venture, typically in the financial industry, such as insurance or securities.

Economy

The system of production, distribution, and consumption of goods and services within a particular geographic region.

Entrepreneur's Creativity

The capacity of an entrepreneur to generate innovative ideas, envision new products, or find unique solutions to problems.