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Dear Mr. John,
In case of MMC, they have right to delay produce and maket the new software in period of two year.
As i understand, if delay, all the job from develop program, gaming platform…to commercial production and marketing are all delay after remove considerable uncertainty. Therefore, expected cost of delay are all first two-year expenses, not only $35m at the end of year two.
However, the Answer assumed only production and marketing jobs are delayed => $35m as delaying costs.
Is it reasonable to delay only commercial stages? if after two years, the film was not successful and MM decide to withdraw from the project, then pre-paid initial cost such as game development, platform preparation etc were all unwise.
I expect to delay all the project stages from initial development to commercial production.
What was wrong here? and whether i misunderstand?
You are misreading the question.
If the option did not exist then if they would have to make the decision as to whether or not to do the project based on the expected flows, but because of the uncertainty the flows could be a lot better or a lot worse – they could end up doing terribly.
However, the option they have is that after the two years (when they will then be more certain about things) they can then decide whether to continue or not. They will certainly have spent the money developing and that would be lost whatever happened, but if they realised that it would continue to lose even more by continuing then they could stop at the end of the 2 years.
all of the job, and even the adventure movies are not started yet. Therefore, delay option can be available for full project (means include both first two year of initiation investment), not only after two-year period to decide whether continue or not. As I confused, whether it is wise to make option until this stage (after two years) which is only suitable when now is the end the second year.
The delay option is not available for the full project.
The question says that they can delay the decision to produce and market the game – not that they can delay the payment for the rights (which would be unrealistic anyway) and not that they can delay the development costs (if they didn’t spend on them than there would be nothing to sell in 2 years time anyway).
An option is always the right to do something at a future time – here they have the right to delay the decision as to whether to spend the extra 35M.
If the option did not exist then they would have to decide now whether to do nothing or to go ahead and develop, produce, and market – going ahead would be risky because of the uncertainty. The option means that in 2 years time when they have more information they will be able to decide whether to invest an additional 35M or just to ‘cut their losses’ and stop completely. This makes the whole project more attractive (because the worst that can happen is they just lose the amount spent in the first two years).
Oh, you’re probably right, but it is not familiar with my common senses :D.
Anyway, i will re-grasp it in my own way. Thank you sir for your helpings 🙂You are welcome as always – do ask again if you do not manage to re-grasp it 🙂
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