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
E)$1,234,870

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV), we need to calculate the present value of all cash flows and subtract the initial investment.

PV of cost = $850,000 + $850,000/(1+0.09)^2 = $1,576,572.58
PV of income = $1,200,000/(1+0.09) + $1,200,000/(1+0.09)^2 + $1,200,000/(1+0.09)^3 = $3,567,791.09

NPV = PV of income - PV of cost = $3,567,791.09 - $1,576,572.58 = $1,991,218.51

Therefore, the net present value of this decision is $991,220, which is closest to option A. Therefore, option A is the best choice.

A Manufacturer of Video Games Develops a New Game Over