You are planning to produce a new action figure called \"Hillary\". However, you

Question

You are planning to produce a new action figure called "Hillary".  However, you are very uncertain about the demand for the product. If it  is a hit, you will have net cash flows of $50 million per year for three  years (starting next year, i.e., at t = 1). If it fails, you  will only have net cash flows of $10 million per year for two years  (also starting next year). There is an equal chance that it will be a  hit or failure (probability = 50%). You will not know whether it is a  hit or a failure until the first year's cash flows are in, i.e., at t  = 1. You have to spend $80 million immediately for equipment and the  rights to produce the figure. If you can sell your equipment for $60  million immediately after the first year's cash flows are received,  calculate Hillary's NPV with this abandonment option. (The discount rate  is 10%. The equipment can only be resold at the end of the first year.)

Explanation / Answer

Answer is -9.1

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