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%?

Question

Quizplus · Accepted Answer

The NPV is calculated by discounting all cash flows to the present value using the cost of capital. The immediate cost is $850,000, and the cost at the end of two years is $850,000/(1.09)^2. The revenues are $1.2 million per year for three years, discounted as $1.2M/(1.09)^2, $1.2M/(1.09)^3, and $1.2M/(1.09)^4. Summing these gives the NPV.

A Manufacturer of Video Games Develops a New Game Over