Question

You are considering making a movie. The movie is expected to cost $10.7 million upfront and take a year to make. After​ that, it is expected to make $4.5 million in the first year it is released​ (end of year​ 2) and $1.7 million for the following four years​ (end of years 3 through​ 6) . What is the payback period of this​ investment? If you require a payback period of two​ years, will you make the​ movie? What is the NPV of the movie if the cost of capital is 10.2%​?

Answer 1

Payback	5.65
NPV	-31.12

Since the payback is more than 2 years, the movie should not be made.

The cash flows and cumulative CF are

Year	Cash flow (Million$)	Cumulative Cash flow
0	-10.7	-10.7
1	0	-10.7
2	4.5	-6.2
3	1.7	-4.5
4	1.7	-2.8
5	1.7	-1.1
6	1.7	0.6

Payback = Year in which Cumulative CF is last negative -(Last negative cumulative CF/ CF of next year

WORKINGS