You are considering making a movie. The movie is expected to cost $10.5 million

Question

You are considering making a movie. The movie is expected to cost $10.5 million upfront and take a year to make. Afterthat, it is expected to make $4.9 million in the first year it is released(end of year2) and

$ 2.2 million for the following four years(end of years 3 through6). What is the payback period of thisinvestment? If you require a payback period of twoyears, will you make themovie? 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?

What is the payback period for this investment?

The payback period is ? years (Round up to nearest integer)

Based on the payback period requirement, would you make this movie?

What is the NPV of the movie if the cost of the capital is 10.2%?

The NPV is $?million (Round to three decimal places)

Explanation / Answer

cash inflow in the first four years = 4.4 + 2.2 + 2.2 = 9.3

payback = 4 + (10.5 - 9.3)/2.2 = 4.55

reject the movie based on payback

NPV = -0.747 million

10.20% Cash flows Year Discounted CF                    (10.50) 0 -10.50                             -   1 0.00                         4.90 2 4.03                         2.20 3 1.64                         2.20 4 1.49                         2.20 5 1.35                         2.20 6 1.23

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