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 4.9 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 10.2%? What is the payback period of this investment?

Answer 1

Calculation of payback period of investment in a movie
Year	Cash flow (in millions)	Cumulative cash flow (in millions)
0	-$10.50	-$10.50
1	$4.90	-$5.60
2	$1.70	-$3.90
3	$1.70	-$2.20
4	$1.70	-$0.50
5	$1.70	$1.20
Payback period of this investment = 4 years + [$0.5 million / $1.7 million] = 4.29 years
You will not make a movie if required payback period is 2 years as the investment has payback period of 4.29 years.
Calculation of NPV of investment in a movie
Year	Cash flow (in millions)	Discount factor @ 10.2%	Present Value (in millions)
0	-$10.50	1	-$10.50
1	$4.90	0.907441016	$4.45
2	$1.70	0.823449198	$1.40
3	$1.70	0.747231577	$1.27
4	$1.70	0.678068582	$1.15
5	$1.70	0.615307243	$1.05
NPV of investment			-$1.18
Investment in a movie doesn't have a positive NPV.