A Manufacturer of Video Games Develops a New Game Over

question 117

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.The net present value (NPV) of this investment at a cost of capital of 9% indicates that this is a worthwhile investment.By how much would the cost of capital have to increase for the NPV to be zero?

• A)7%
• B)9%
• C)12%
• D)16%
• E)19%

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Definitions:

Annual Real Rate

The annual rate of return on an investment, adjusted for inflation, indicating the real increase in the value of the investment over a year.

Inflation Rate

The pace at which prices for goods and services increase, leading to a decrease in purchasing power.

Nominal Rate of Interest

The advertised interest rate on a loan or investment, not accounting for inflation.

Purchasing Power

The amount of goods or services that one unit of currency can buy, often used to measure the impact of inflation.