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Hi,
Can anyhow tell me why Pa for this case is 35m and not 35m + 7m +7m = 49m? thanks!
But if you look at the examiners answer, Pa is not 35M but is 38.75M
38.75M is the present value of the cash flows that would occur after the date that the option could be exercised.
It is Pe that is 35M 🙂
Thanks John,
Sorry for my error, my question is why is Pe (the capital investment required) $35m. It was stated in the question that MMC will spend $7m at the start of each of the next two years to develop the game, and $35m for the production. So why is the Pe not 35m + 7m +7m instead? Thank you!
The option is as to whether or not to invest the 35M and we will decide at the end of the two years.
We will paying out the 7M at the start of each of the two years whether or not we exercise the option.hi,
my question is why do we have 6 yrs instead of 4 yrs when calculating the pv of the project ?
thanks.
Because it is 2 years before the game goes on sale and then it generates flows for the following 4 years.
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