Question

You are considering making a movie. The movie is expected to cost $ 10.3 million upfront and take a year to make. After​ that, it is expected to make $ 4.4 million in the first year it is released​ (end of year​ 2) and $ 1.9 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 10.1 % ​? According to the NPV​ rule, should you make this​ movie? What is the payback period of this​ investment?

Answer 1

Payback period is the period in which initial investment is recovered.

Year	Opening Bal	CF	Closin Bal
1	$   10.30	$      4.40	$      5.90
2	$      5.90	$          -	$      5.90
3	$      5.90	$      1.90	$      4.00
4	$      4.00	$      1.90	$      2.10
5	$      2.10	$      1.90	$      0.20
6	$      0.20	$      1.90	$    -1.70

PBP = Year in which least +ve CB + [ CB in that Year / CF in Next year ]

= 5 + [ 0.2 / 1.9 ]

= 5 + 0.11

= 5.11 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 @10.1%	Disc CF
0	$ -10.30	1.0000	$ -10.30
1	$      4.40	0.9083	$      4.00
2	$          -	0.8249	$          -
3	$      1.90	0.7493	$      1.42
4	$      1.90	0.6805	$      1.29
5	$      1.90	0.6181	$      1.17
6	$      1.90	0.5614	$      1.07
NPV			$    -1.35

Project Rejected as it has -ve NPV

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