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Fox Searchlight Pictures recently purchased a script for a new movie about a poker player. The...

Fox Searchlight Pictures recently purchased a script for a new movie about a poker player. The movie would cost $30 million to produce. Given the growing popularity of the game, the producer believes it may be better to delay the start of production. The studio estimates that there is a 25% chance that the popularity of poker will increase in one year, and the movie would be expected to generate $40 million in the first year. Otherwise, the popularity of poker will be the same in one year and the movie would be expected to generate $20 million in the first year. In either case, the movie is expected to generate $5 million in the second year and decline by 5% per year forever. The cost of capital is fixed at 15% and the risk-free rate is 5%.

a) What is the NPV of the project based on the project’s expected future cash flows?
b) What is the embedded option in this project? Is the project worthwhile when considering the option? c) What should they do?

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ekkarill92 answered 2 years ago
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