Question

You are considering making a movie. The movie is expected to cost $10.6 million up front and take a year to produce. After​ that, it is expected to make $4.7million in the year it is released and $1.9 million for the following four years.

What is the payback period of this​ investment?

If you require a payback period of two​ years, will you make the​ movie?

Does the movie have positive NPV if the cost of capital is 10.9%​?

Answer 1

payback period is time to repay the initial investment

amount to payback after year 1 = 10.6 - 4.7 = 5.9 million

payback period

= 1 + 5.9/1.9

= 4.11 years

No, since payback period is greater than 2 years

NPV = -initial investment + PV of future cash flows

Present value = Future value/(1+i)^n

i = interest rate per period

n= number of periods

=>

NPV = -10600000 + 4700000/1.109 + 1900000/1.109^2 + 1900000/1.109^3 + 1900000/1.109^4 + 1900000/1.109^5

= -1035298.00