Question

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

$10.6

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%​?

Answer 1

	Year	Cash flow	Cumulative cash flow	PVIF @ 10.3%	Present value
	0	(10,600,000)	(10,600,000)	1	(10,600,000)
	1	4,900,000	(5,700,000)	0.906618	4,442,430
	2	1,700,000	(4,000,000)	0.821957	1,397,327
	3	1,700,000	(2,300,000)	0.745201	1,266,842
	4	1,700,000	(600,000)	0.675613	1,148,542
	5	1,700,000	1,100,000	0.612523	1,041,289
					(1,303,571)
Ans a)	Payback period =
	4+600000/1700000	4.35	year
	since payback period is higher than 2 year. Therefore movie should be rejected
Ans b)	NPV =	(1,303,571)
	Since NPV is negative therefore movie should be rejected