A Manufacturer of Video Games Develops a New Game Over

question 87

Multiple Choice

A manufacturer of video games develops a new game over two years.This costs $850,000 per year with one payment made immediately and the other at the end of two years.When the game is released,it is expected to make $1.2 million per year for three years after that.What is the net present value (NPV) of this decision if the cost of capital is 9%?

• A)$991,220
• B)$1,071,432
• C)$1,564,559
• D)$1,841,093

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Definitions:

Expected Return

The projected average return of an investment, taking into account all possible outcomes and their likelihoods.

Beta

A measure of a stock's volatility in relation to the overall market, used in the capital asset pricing model to determine risk.

Risk-Free Rate

The theoretical rate of return of an investment with no risk of financial loss, often represented by the yield on government bonds.

Systematic Risk

The risk inherent to the entire market or market segment, unmitigable through diversification, often related to economic, political, or societal factors.