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 $4.6 million in the year it is released and $1.7 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 10.5%?

A) What is the payback period of this investment?

The payback period is ______ years. (round the tenth)

B) If you require a payback period of two years, will you make the movie? Yes/No

C) Does the movie have positive NPV if the cost of capital is 10.5%? If the cost of capital is 10.5%, the NPV is _________ million (round to hundreth)

Answer 1

A. Total amount generated = 4.6 + 1.7 x 4 = 11.4. Hence, the payback period will be = 4 + (10.2 - (4.6 + 1.7 x 3))/1.7 = 4.294 years.

B. No, we wouldn't as the payback period will be more than 2 years.

C. NPV = -10.2 + 4/1.105 + 1.7 x (1/1.105^2 + 1/1.105^3 + 1/1.105^4 + 1/1.105^5) = - 1.755 million