In: Finance
You are considering making a movie. The movie is expected to cost $ 10.9 million upfront and take a year to make. After that, it is expected to make $ 4.8 million in the first year it is released (end of year 2) and $ 1.8 million for the following four years (end of years 3 through 6) . What is the payback period of this investment? If you require a payback period of two years, will you make the movie? What is the NPV of the movie if the cost of capital is 10.5 % ? According to the NPV rule, should you make this movie? What is the payback period of this investment?
Payback period is the period in which initial investment is recovered.
Year | Opening Bal | CF | Closing Bal |
1 | 10.9 | 4.8 | 6.1 |
2 | 6.1 | 0 | 6.1 |
3 | 6.1 | 1.8 | 4.3 |
4 | 4.3 | 1.8 | 2.5 |
5 | 2.5 | 1.8 | 0.7 |
6 | 0.7 | 1.8 | -1.1 |
PBP = Year in which least +ve CB + [ CB in that Year / CF in Next year ]
= 5 + [ 0.7 / 1.8 ]
= 5 + 0.39
= 5.39 Years
Project Rejected as expected Payback is 2 Years and Actual Payback is 5.39 Years.
NPV = PV of Cash Inflows - PVof CashOutflows
Year | CF | PVF @10.5% | Disc CF |
0 | $ -10.90 | 1.0000 | $ -10.90 |
1 | $ 4.80 | 0.9050 | $ 4.34 |
2 | $ - | 0.8190 | $ - |
3 | $ 1.80 | 0.7412 | $ 1.33 |
4 | $ 1.80 | 0.6707 | $ 1.21 |
5 | $ 1.80 | 0.6070 | $ 1.09 |
6 | $ 1.80 | 0.5493 | $ 0.99 |
NPV | $ -1.93 |
Project Rejected as it has -ve NPV.