Question

You are considering making a movie. The movie is expected to cost $ 10.4 million up front and take a year to produce. After​ that, it is expected to make $ 4.6 million in the year it is released and $ 1.6 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

Payback period is calculated below:

Year	Opening Balance	CF	Closing Balance
1	$                    10.40	$4.60	$                    5.80
2	$                       5.80	$1.60	$                    4.20
3	$                       4.20	$1.60	$                    2.60
4	$                       2.60	$1.60	$                    1.00
5	$                       1.00	$1.60	$                  -0.60

• Opening balance = previous year's closing balance
• Closing balance = Opening balance -CF
• Till year 4 the closing balance was positive but in year 5 it became negative so some time during the year the initial investment got paid off
• required CF was 1 million while generated CF was 1.6 million so time taken to generate 1 million was 1/1.6 x 12 = 7.5 months so the total payback period is 4 years 7.5 months

NPV of the movie production is calculated below:

Year	CF	Discount Factor		Discounted CF
0	$      -10.40	1/(1+0.101)^0=	1	1*-10.4=	$       -10.40
1	$          4.60	1/(1+0.101)^1=	0.908265213	0.908265213442325*4.6=	$           4.18
2	$          1.60	1/(1+0.101)^2=	0.824945698	0.824945697949433*1.6=	$           1.32
3	$          1.60	1/(1+0.101)^3=	0.74926948	0.749269480426369*1.6=	$           1.20
4	$          1.60	1/(1+0.101)^4=	0.680535405	0.680535404565276*1.6=	$           1.09
5	$          1.60	1/(1+0.101)^5=	0.618106634	0.61810663448254*1.6=	$           0.99
				NPV = Sum of all Discounted CF	$         -1.63

As NPV is negative, the movie should not be made.