Question

You are considering making a movie. The movie is expected to cost $10.9 million up front and take a year to produce. After​ that, it is expected to make $4.9 million in the year it is released and $1.8 million for the following four years. What is the payback period of this​ investment? If you require a payback period of two​ years, will you make the​ movie? Does the movie have positive NPV if the cost of capital is 10.6%​?

Answer 1

Movie
Year	Cash flow stream	Cumulative cash flow
0	-10.9	-10.9
1	0	-10.9
2	4.9	-6
3	1.8	-4.2
4	1.8	-2.4
5	1.8	-0.6
6	1.8	1.2
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 5 and 6
therefore by interpolation payback period = 5 + (0-(-0.6))/(1.2-(-0.6))
5.33 Years
Reject project as payback period is more than 2 years
Movie
Discount rate	0.106
Year	0	1	2	3	4	5	6
Cash flow stream	-10.9	0	4.9	1.8	1.8	1.8	1.8
Discounting factor	1	1.106	1.223236	1.352899	1.4963063	1.654915	1.830336
Discounted cash flows project	-10.9	0	4.005768	1.330476	1.2029622	1.087669	0.983426
NPV = Sum of discounted cash flows
NPV Movie =	-2.29
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
NPV is negative