Question

You are considering making a movie. The movie is expected to cost $100 million upfront and takes a year to make. After that, it is expected to make $80 million in the first year it is released and $6 million for the following 20 years. Your cost of capital is 10%.

a.) What is the payback period of this investment? (Hint: consider that you look upfront at this, that is from year=0. For solving this task it is necessary to consider carefully the timeline of the cash flows in years=0,1,2,3,....,21,22)

The payback period is _____ years. (round to a full year)

b.) If you require a payback period of two years, will you make the movie?

Answer: _____(fill in "yes" or "no")

c.) What is the NPV of this project?

The NPV is ______$ million. (round to two decimals)

d.) According to the NPV rule, should you make the movie?

Answer:_______  (fill in "yes" or "no")

Answer 1

	The cash flows for the project would be:
	t0 = -$100 m
	t1 = $0
	t2 = $80 m
	t3 to t22 $6 m every year
a)	Payback period = 3 Years.
b)	No, as the actual payback is more than the maximum
	prescribed payback period.
c)	NPV = -100+80/1.1^2+6*(1.10^20-1)/(0.1*1.1^20*1.1^2) =	$          8.33	million
d)	Yes, as the NPV of the movie is positive.