A Manufacturer of Video Games Develops a New Game Over

question 93

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

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Definitions:

Non-Interest-Bearing Note

A financial instrument or loan that does not accrue interest over time, requiring the borrower to repay only the principal amount.

U.S. Dollar Equivalent

The U.S. Dollar Equivalent is the amount of foreign currency expressed in terms of the value of the United States dollar, based on the current exchange rate.

Put Option

A financial instrument that gives the holder the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time.

Fair Value Hedge

A risk management strategy that uses financial instruments to mitigate the risk of changes in the fair value of an asset or liability.