Question

You are considering making a movie. The movie is expected to cost $10.3 million up front and take a year to produce. After​ that, it is expected to make $4.6 million in the year it is released and $1.9 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 10.9%​?

Answer 1

Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]

= 3 + (1.90/1.90)

= 4 Years

Hence the correct answer is 4.00 years

Note:

Year	Investment	Cash Inflow	Net Cash Flow
0	-10.30	-	-10.30	(Investment + Cash Inflow)
1	-	4.60	-5.70	(Net Cash Flow + Cash Inflow)
2	-	1.90	-3.80	(Net Cash Flow + Cash Inflow)
3	-	1.90	-1.90	(Net Cash Flow + Cash Inflow)
4	-	1.90	-	(Net Cash Flow + Cash Inflow)
5	-	1.90	1.90	(Net Cash Flow + Cash Inflow)

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The correct answer is No.

This is because the actual payback period exceeds the required payback period

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NPV = Present Value of cash inflows - Present Value of cash outflows

= [ $4.6*1/(1.109) ^ 1 + 1.9*1/(1.109) ^2+*1/(1.109) ^3+*1/(1.109) ^4+*1/(1.109) ^5]- $ 10.3

= -$ 0.83 Million

= - $ 830,000

The project has a negative NPV.

The correct answer is No.