Question

The CEO of Garneau Cinemas is considering making a movie and must decide between a comedy and a thrillerlong dashit ​doesn't have the production space to make both. The comedy is expected to cost ​$20 million up front​ (at t​ = 0). After​ that, it is expected to make ​$13 million in the first year​ (at t​ = 1) and ​$4 million in each of the following two years​ (at t​ = 2 and t​ = 3). In the fourth year​ (at t​ = 5), it is expected that the movie can be sold into syndication for ​$2 million with no further cash flows back to Garneau Cinemas. The thriller is expected to cost ​$35 million up front​ (at t​ = 0). After​ that, it is expected to make ​$15 million in the first year​ (at t​ = 1) and ​$3 million in each of the following four years​ (at t​ = 2,​ 3, 4, and​ 5). In the sixth year​ (at t​ = 6), it is expected that the movie can be sold into syndication for ​$30 million with no further cash flows back to Garneau Cinemas. The cost of capital is 10​%, and Garneau usually requires projects to have a payback within four years. Determine each​ project's payback and​ NPV, and advise the CEO what she should do.

The payback for the comedy is? years, and the NPV of the comedy is ?

The payback for the thriller is ? ​years, and the NPV of the thriller is ?

​(Round to two decimal places as​ needed.)

Advise the CEO. Choose the correct answer below.

A. Since the thriller has the higher​ NPV, it should be selected.

B. Since the comedy has the higher​ NPV, it should be selected.

C. Since one project has a negative​ NPV, the other project should be selected even though it has a payback greater than four years. If that​ project's longer payback period is​ unacceptable, then neither project should be accepted.

D. Since only one of the projects has a payback period of less than four​ years, it should be selected. Projects that pay the company back quicker are always preferable to projects that do not pay the company back as quickly.

Answer 1

Option 1 Comedy Movie
Particulars	Amount
Initial Investment	$   2,00,00,000.00
	Year 1	Year 2	Year 3	Year 4
Cash Inflows	$   1,30,00,000.00	$    40,00,000.00	$    40,00,000.00	$    20,00,000.00
Cumulative Cash Inflow	$   1,30,00,000.00	$ 1,70,00,000.00	$ 2,10,00,000.00	$ 2,30,00,000.00
Payback Period (Years) (2+((Initial Investment-17000000)/4000000))	2.75
Present Value Rate @ 10% (1/1.1)	0.91	0.83	0.75	0.68
Present Value of future Cash Flow (Cash Inflow* PV Rate)	$   1,18,18,181.82	$    33,05,785.12	$    30,05,259.20	$    13,66,026.91
Cumulative Discounted Cash Inflows	$   1,18,18,181.82	$ 1,51,23,966.94	$ 1,81,29,226.15	$ 1,94,95,253.06
Total of Discounted Cash Inflow	$   1,94,95,253.06
Net Present Value (Total Discounted Cash Inflow- Initial Investment)	$       -5,04,746.94
Discounted Payback Period	Since the NPV is negative there is no payback period
Note: In the question for fourth year t=5 is given. This is considered as a mistake, since fourth year should be t=4
Option 2 Thriller Movie
Particulars	Amount
Initial Investment	$   3,50,00,000.00
	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Cash Inflows	$   1,50,00,000.00	$    30,00,000.00	$    30,00,000.00	$    30,00,000.00	$    30,00,000.00	$ 3,00,00,000.00
Cumulative Cash Inflow	$   1,50,00,000.00	$ 1,80,00,000.00	$ 2,10,00,000.00	$ 2,40,00,000.00	$ 2,70,00,000.00	$ 5,70,00,000.00
Payback Period (Years) (5+((Initial Investment-27000000)/30000000))	5.27
Present Value Rate @ 10% (1/1.1)	0.91	0.83	0.75	0.68	0.62	0.56
Present Value of future Cash Flow (Cash Inflow* PV Rate)	$   1,36,36,363.64	$    24,79,338.84	$    22,53,944.40	$    20,49,040.37	$    18,62,763.97	$ 1,69,34,217.90
Cumulative Discounted Cash Inflows	$   1,36,36,363.64	$ 1,61,15,702.48	$ 1,83,69,646.88	$ 2,04,18,687.25	$ 2,22,81,451.22	$ 3,92,15,669.12
Total of Discounted Cash Inflows	$   3,92,15,669.12
Net Present Value	$      42,15,669.12
Discounted Payback Period	5.75
Answer
C. Since one project has a negative​ NPV, the other project should be selected even though it has a payback greater than four years. If that​ project's longer payback period is​ unacceptable, then neither project should be accepted.

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