Question

You are considering making a movie. The movie is expected to cost $10.5 million up front and take a year to produce. After​ that, it is expected to make $4.3 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 10.5%​?

Answer 1

Ans:- Net Present Value = Present Value of cash flows - Initial investment.

PV = CF0/(1+r)^1+CF1/(1+r)^2......................CFn/(1+r)^n, where from CF1 to CFn is the cash flow from year 1 to year n, r is the cost of capital and n is the number of periods

Payback Period = No of years before payback period + ( Initial Investment - cumulative cash flow in the year before recovery) / cash flow in the year of recovery.

CCF in excel image is cumulative cash flows.

Ans:- If the Payback period is 2 years, then the investors should not make this movie because the actual payback period for the movie is approx 5.26 years.

Ans:- No the movie does not have positive NPV if the cost of capital is 10.5%.