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You are considering making a movie. The movie is expected to cost $10.9 million up front...

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Finance

You are considering making a movie. The movie is expected tocost $10.9 million up front and take a year to produce. After​that, it is expected to make $4.9 million in the year it isreleased and $1.8 million for the following four years. What is thepayback period of this​ investment? If you require a payback periodof two​ years, will you make the​ movie? Does the movie havepositive NPV if the cost of capital is 10.6%​?

Answer & Explanation Solved by verified expert
4.0 Ratings (709 Votes)

Movie
Year Cash flow stream Cumulative cash flow
0 -10.9 -10.9
1 0 -10.9
2 4.9 -6
3 1.8 -4.2
4 1.8 -2.4
5 1.8 -0.6
6 1.8 1.2
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 5 and 6
therefore by interpolation payback period = 5 + (0-(-0.6))/(1.2-(-0.6))
5.33 Years
Reject project as payback period is more than 2 years
Movie
Discount rate 0.106
Year 0 1 2 3 4 5 6
Cash flow stream -10.9 0 4.9 1.8 1.8 1.8 1.8
Discounting factor 1 1.106 1.223236 1.352899 1.4963063 1.654915 1.830336
Discounted cash flows project -10.9 0 4.005768 1.330476 1.2029622 1.087669 0.983426
NPV = Sum of discounted cash flows
NPV Movie = -2.29
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
NPV is negative
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