Question

In: Finance

You are considering making a movie. The movie is expected to cost $ 10.9 million upfront...

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?

Solutions

Expert Solution

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.


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