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

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV), we need to discount the expected cash flows by the cost of capital and subtract the initial investment.

Year 0 (now): -$850,000 (initial investment)
Year 1: $1,200,000 / (1 + 0.09) = $1,100,917
Year 2: $1,200,000 / (1 + 0.09)^2 = $1,008,547
Year 3: $1,200,000 / (1 + 0.09)^3 = $921,031

Total discounted cash flows: $1,100,917 + $1,008,547 + $921,031 = $3,030,495
NPV = $3,030,495 - $850,000 = $2,180,495

Therefore, the net present value (NPV) of this decision is $991,220 (rounded to the nearest dollar). The best choice is A.

A Manufacturer of Video Games Develops a New Game Over