Question

In: Finance

You are considering making a movie. The movie is expected to cost $ 10.7 million up...

You are considering making a movie. The movie is expected to cost $ 10.7 million up front and take a year to produce. After​ that, it is expected to make $ 4.8 million in the year it is released and $ 2.2 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 %​?

Solutions

Expert Solution

Initial investment = $10,700,000

Therefore payback period is 4 years.

No, if the required payback period is 2 years, then you should not make the movie.

Calculation of NPV:

NPV of this movie is negative when the cost of capital is 10.6%.

Discount Factor formula:

Where,
i = cost of capital
n = number of periods

For example:

For year 1:

Discount factor = 1/(1+0.106)1 = 0.904159132

For year 2:

Discount factor = 1/(1+0.106)2 = 0.817503736

and so on...


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