Question

You are considering making a movie. The movie is expected to cost $10.8 million up front and take a year to produce. After? that, it is expected to make $4.1 million in the year it is released and $1.7 million for the following four years.a) What is the payback period of this? investment?b) 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%??npv is _?a) ans is (5.9)plz give me ans b.-2.28 is wrong nas (round to the to decimal number)

Answer 1

Given data:

Initial Investment = $ 10.8 Million

Cash Inflows for next 5 years:

Year 1   = $4.1 Million

Year 2 = 1.7 Million

Year 2 = 1.7 Million

Year 3 = 1.7 Million

Year 4 = 1.7 Million

Cost of capital = 10.6 %

Total Cash inflow in 5 years after releasing movie = 4.1+4(1.7) = 10.9 Million $

Now to calculate payback period we need the time span in which we would be able to recover our initial investment cost.

Cash Inflow for 4 years = 4.1 + 3(1.7) = 9.2

Lets distribute year 5’s cash inflows in 12 months , therefore every month’s cash inflow = 1.7/12 = 0.141667 Million $

Per month cash inflow in year 5 = 0.141667 Million $

Per day cash inflow in year 5 = 1.7/ 365 = 0.004658 Million $

Cash inflow upto payback period = 4.1 + 3x1.7 + 11x0.141667 +9x0.004658 = 10.80025 Million $

So the payback period is 4 years 11 months and 9 days =(4x365+11*30+9)/12 =    payback = 4.928767 years

If we require payback period of 2 years then it is not possible to recover initial investment in 2 years as per the given cash inflows. Initial investment will be able to recover in 4.928767 years only . Hence we should not make movie if we planning the payback period of 2 years as in 2 years we would be able to recover only 4.1+1.7 = 5.8 million $ only.

Net present value of project (NPV) = C x {(1 - (1 + R)^-T) / R} ? Initial Investment

NPV = NPV = (C for Period 1 / (1 + R)¹) + (C for Period 2 / (1 + R)²) ... (C for Period x / (1 + R)^x) - Initial Investment

NPV= 4.1/(1+0.106)¹ + 1.7/(1+0.106)² + 1.7/(1+0.106)³+ 1.7/(1+0.106)⁴ +1.7/(1+0.106)⁴ – 10.8 = -2.28326

NPV = -2.28326

No the move have negative NPV hence not feasible if cost of capital is 10.6 %