In: Finance
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 %?
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...