Question

You are considering making a movie. The movie is expected to cost $ 10.2 million up front and take a year to produce. After​ that, it is expected to make $ 4.9 million in the year it is released and $ 2.1 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 %​?
What is the payback period of this​ investment?

Answer 1

NPV = PV of cash Inflows - PV of Cash Outflows

Year	CF	PVF @10.6%	Disc CF
0	$ -10.20	1.0000	$ -10.20
1	$          -	0.9042	$          -
2	$      4.90	0.8175	$      4.01
3	$      2.10	0.7392	$      1.55
4	$      2.10	0.6683	$      1.40
5	$      2.10	0.6043	$      1.27
6	$      2.10	0.5463	$      1.15
NPV			$    -0.82

Pay back period is the period in which initial invetsment is recovered.

Year	Opening Bal	CF	Closing Bal
1	$        10.20	$          -	$   10.20
2	$        10.20	$      4.90	$      5.30
3	$           5.30	$      2.10	$      3.20
4	$           3.20	$      2.10	$      1.10
5	$           1.10	$      2.10	$    -1.00
6	$         -1.00	$      2.10	$    -3.10

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

= 4 + [ 1.01 / 2.1 ]

= 4 + 0.52

= 4.52 Years

Project is Rejected as it has -ve NPV and Actual PBP > Expected PBP.