Question

You are considering making a movie. The movie is expected to cost $10.1 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 $1.9 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 10.1%​?

Answer 1

Hello Sir/ Mam

(a)

Years	Cashflows	Cumulative
0	-$10,100,000.00	-$10,100,000.00
1	$0	-$10,100,000.00
2	$4,100,000.00	-$6,000,000.00
3	$1,900,000.00	-$4,100,000.00
4	$1,900,000.00	-$2,200,000.00
5	$1,900,000.00	-$300,000.00
6	$1,900,000.00	$1,600,000.00

(b) If my target is 2 years, I will not make the movie.

(c) At, 10.1% Cost of Capital, the project doesn't have positifve NPV.

Years	Cashflows	PVF	PV
0	-$10,100,000.00	1.000000	-$10,100,000.00
1	$0.00	0.908265	$0.00
2	$4,100,000.00	0.824946	$3,382,277.36
3	$1,900,000.00	0.749269	$1,423,612.01
4	$1,900,000.00	0.680535	$1,293,017.27
5	$1,900,000.00	0.618107	$1,174,402.61
6	$1,900,000.00	0.561405	$1,066,669.03
NPV			-$1,760,021.72

I hope this solves your doubt.

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