Question

You have been hired by a movie company and asked whether they should invest in a...

You have been hired by a movie company and asked whether they should invest in a streaming service, and have collected the following information:

• The company will have to spend $2 billion in acquiring a proprietary streaming product. This investment will be depreciated straight line over five years to a salvage value of zero.

• You expect to have 25 million subscribers, paying $100/year, for the next five years and the operating expenses (not including depreciation) of servicing these subscribers to be 60% of revenues.

• The cost of capital is 8% and the marginal tax rate is 25%.

• To provide exclusive content on its streaming, the company will have to pull movies that it now shows on Netflix and forfeit $500 million in licensing fees (pre tax) that it would have received every year for the next five years.

Estimate the net present value of the streaming service, assuming that it will be wound up in five years.

Homework Answers

Answer #1

please upvote if it helped

comment for doubts

note: since forfeit expense is a non cash expense it is added back.

thanks.

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