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A manufacturer of video games develops a new game over two years. This costs $830,000 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 $1.20 million per year for three years after that. What is the net present value (NPV) of this decision if the cost of capital is 10%?

Respuesta :

BlueSky06
To get the NET PRESENT VALUE or NPV, you need to used this formula NPV = [P / (1 + i) t] -C
Where P= Net period cash flow, i= Discount rate or rate of return, t= number of time periods, C=initial investment

Given
P= $1.20 million
i= 10%
t= 1 year
C= 830,000

Solution

NPV = [1,020,000 / (1 + .1) 1] - 830,000
        = [1,020,000 / (1.1)] -830,000
        = 927,272.73 - 830,000
        = $97,272.73

The NPV is $97,272.73

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