Question

Suppose that Disney is considering one more Toy Story movie. The company is not confident in box office sales, but they do believe that the file will create merchandising opportunities (DVDs, toys, clothes,..etc). Their early analysis believes the move will have an NPV of -$39.00 million if you only look at ticket sales in the theater. However, they also believe that the movie will create sales of $82.00 million per year in merchandise. The merchandise sales will decline each year by 26.00% in perpetuity. Let’s assume that after-tax operating margin on these sales is 11.00%, and that Disney has a cost of capital at 10.00%.

A) What is the cash flow created by the merchandise side effect in the first year? (answer in terms of millions, so 1,000,000 would be 1.00)

B) Let’s value this as a perpetuity. The merchandise sales will continue indefinitely, BUT the sales will decrease each year. What is the net NPV for creating the movie? (answer in terms of millions, so 1,000,000 would be 1.00)

Answer 1

Figures in Millions
A)
Sales by Merchandise in the First Year	82.00
After Tax Operating Margin	11%
Cash Inflow after Tax	9.02
B)
NPV of Movie	-39
NPV of Merchandise
Cash Inflow after 1 year (D1)	9.02
Cost of Investment (Re)	10%
Growth (g)	-26%
PV of Growing Perpetuity	D1/ (Re-g)
	9.02 /(0.1-(-0.26))
	25.06
NPV of Movie + Merchandise	-13.94