Question

You are considering making a movie. The movie is expected to cost $10.1million 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 10.4%​?

Answer 1

Movie
Year	Cash flow stream	Cumulative cash flow
0	-10.1	-10.1
1	0	-10.1
2	4.1	-6
3	1.9	-4.1
4	1.9	-2.2
5	1.9	-0.3
6	1.9	1.6

Payback period is the time by which undiscounted cashflow cover the intial investment outlay

this is happening between year 5 and 6

therefore by interpolation payback period = 5 + (0-(-0.3))/(1.6-(-0.3))

5.16 Years

which is more than cut off period of 2 years, do not make movie

Movie
Discount rate	10.400%
Year	0	1	2	3	4	5	6
Cash flow stream	-10.1	0	4.1	1.9	1.9	1.9	1.9
Discounting factor	1.000	1.104	1.219	1.346	1.486	1.640	1.811
Discounted cash flows project	-10.100	0.000	3.364	1.412	1.279	1.159	1.049
NPV = Sum of discounted cash flows
NPV Movie =	-1.84
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

NPV is negative