Jekyll and Hyde, Inc. has just purchased the rights to a movie. The company has

Question

Jekyll and Hyde, Inc. has just purchased the rights to a movie. The company has the option of producing the movie on either a large budget of $25 million or a small budget of $10 million. The cash flow in year 1 for the large budget movie is $65 million, while the cash flow in year 1 for the small-budget movie is $40 million. The cost of capital is 25%. Which project should be accepted? a. The large-budget movie because the IRR is higher. b. The small-budget movie because the NPV is lower. c. The large-budget movie because the NPV is higher. d. The small-budget movie because the IRR is lower.

Explanation / Answer

Hi,

Please find the detailed answer as follows:

NPV (Large Budget) = -25+65/(1+0.025)^1 = $38.41

NPV (Small Budget) = -10+40/(1+0.025)^1 = $29.02

Option C (The large-budget movie because the NPV is higher) is the correct answer.

Thanks.

Related Questions

Navigate

• Browse (All)
• Browse J
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.