Games Unlimited Inc

question 32

Multiple Choice

Games Unlimited Inc.is considering a new game that would require an investment of $20.0 million.If the new game is well received,then the project would produce cash flows of $9.5 million a year for 3 years.However,if the market does not like the new game,then the cash flows would be only $6.0 million per year.There is a 50% probability of both good and bad market conditions.The firm could delay the project for a year while it conducts a test to determine if demand would be strong or weak.The project's cost and expected annual cash flows would be the same whether the project is delayed or not.If the WACC is 9.0%,what is the value (in thousands) of the investment timing option? ​

• A)$1,857
• B)$2,042
• C)$2,246
• D)$2,471
• E)$2,718

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Definitions:

Selling Price

The amount charged to the customer for a product or service, determining the revenue generated from sales.

Net Operating Income

A company's revenue minus operating expenses, not including taxes and interest.

Sales Volume

The quantity of units sold within a specified period, crucial for analyzing a company's performance and planning production.

Variable Cost

Costs that vary directly with the level of production or sales volume, such as materials and labor directly involved in creating a product.