Question

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

$10.4

million up front and take a year to produce. After​ that, it is expected to make

$4.3

million in the year it is released and

$1.8

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

10.6%​?

If the cost of capital is

10.6 %10.6%​,

the NPV is?

Answer 1

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Answer:

NPV = PV of cash Inflows - PV of Cash Outflows

Year	CF	PVF @10.6%	Disc CF
0	-10.4	1	-10.4
1		0.904159132	0
2	4.3	0.817503736	3.515266065
3	1.8	0.739153468	1.330476243
4	1.8	0.668312358	1.202962245
5	1.8	0.604260722	1.087669299
6	1.8	0.54634785	0.98342613
NPV			-2.28

Year	Opening Bal	CF	Closing Bal
1	10.4		10.4
2	10.4	4.3	6.10
3	6.10	1.8	4.30
4	4.30	1.8	2.50
5	2.50	1.8	0.70
6	0.70	1.8	-1.10

Pay back period is the period in which initial invetsment is recovered.

PBP = Period in which least +ve CB + [ CB in that year / CF in next Year ]

Payback Period: 5.389 years ~ 5.4 YEARS

Project is Rejected as it has -ve NPV and Actual PBP > Expected PBP.