Problem:
Games Unlimited Inc. is considering a new game that would require an investment of $20.0 million. If the new game is well received, then the project would produce cash flows of $9.5 million a year for 3 years. However, if the market does not like the new game, then the cash flows would be only $6.0 million per year. There is a 50% probability of both good and bad market conditions. The firm could delay the project for a year while it conducts a test to determine if demand would be strong or weak. The project's cost and expected annual cash flows would be the same whether the project is delayed or not.
Required:
Question: If the WACC is 10.8%, what is the value (in thousands) of the investment timing option? 1. $1,606 2. $1,740 3. $1,413 4. $1,458 5. $1,487
Note: Please explain comprehensively and give step by step solution.