You are considering making a movie. The movie is expected to cost $10.6 million

Question

You are considering making a movie. The movie is expected to cost $10.6 million upfront and take a year to make. After? that, it is expected to make $4.8 million in the first year it is released? (end of year? 2) and $2.2 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%?? According to the NPV? rule, should you make this? movie?

Explanation / Answer

As per the NPV rule I should not make the movie because here NPV comes negative

The PAyback period is

No we can not make the movie as per Payback period rule also because it is more than 2 years

Project A Year Amount P V Factor@10.2% Present Value Cash outflow 0 10.6 1 10.60 Cumulative Factor Cash inflow 1 0 0 0.91 0.00 Cash inflow 2 4.8 4.8 0.82 3.95 Cash inflow 3 2.2 7 0.75 1.64 Cash inflow 4 2.2 9.2 0.68 1.49 Cash inflow 5 2.2 11.4 0.62 1.35 Cash inflow 6 2.2 13.6 0.56 1.23 NPV is negative -0.93

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