Question

You are considering making a movie. The movie is expected to cost

$10.7

million up front and take a year to produce. After​ that, it is expected to make

$4.9

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

10.3%​?

What is the payback period of this​ investment?  

Answer 1

- Calculating the Payback period of the Project (amt in Millions)

Year	Cash Flows of Project ($)	Cummulative Cash Flows of Project ($)
0	(10.70)	(10.70)
1	4.90	(5.80)
2	1.70	(4.10)
3	1.70	(2.40)
4	1.70	(0.70)
5	1.70	1.00
	1.00

Payback Period = Years before the Payback period occurs + (Cummulative cash flow in the year before recovery/Cash flow in the year before recovery)

Payback Period = 4 years + (0.70/1.70)

Payback Period = 4.41 years

- If you require a payback period of two​ years, you should not make the movie. As it has Payback period of 4.41 years which is higher than what required.

- Calculating the Net Present Value(NPV) if the cost of capital is 10.3% (amt in Millions):-

Year	Cash Flow of Project ($) (a)	PV Factor @10.30% (b)	Present Value of Project ($) [(a)*(b)]
0	(10.70)	1.00000	(10.700)
1	4.90	0.90662	4.442
2	1.70	0.82196	1.397
3	1.70	0.74520	1.267
4	1.70	0.67561	1.149
5	1.70	0.61252	1.041
			(1.40)

So, Net Present Value(NPV) is -$1.40 million

Net Present Value(NPV) of the Movie Project is negative. thus it should not be made.

Note- PV [email protected]% can be taken from PVAF Table or calculated using this formula which is = 1/(1+0.103)^n

where, n = Respective year.

For example, PV [email protected]% of 2nd year = 1/(1+0.103)^2 = 1/1.216609 = 0.82196

If you need any clarification, you can ask in comments.    

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