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 $ 4.4 million in the year it is released and $ 1.7 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 %​?

a.) what is the payback period?

b.) what is the NPV if the cost of capital is 10.6?%

Answer 1

1)

Cumulative cash flow for year 0 = -10.6

Cumulative cash flow for year 1 = -10.6 + 4.4 = -6.2

Cumulative cash flow for year 2 = -6.2 + 1.7 = -4.5

Cumulative cash flow for year 3 = -4.5 + 1.7 = -2.8

Cumulative cash flow for year 4 = -2.8 + 1.7 = -1.1

Cumulative cash flow for year 5 = -1.1 + 1.7 = 0.6

1.1 / 1.7 = 0.65

Payback perod = 4 + 0.65 = 4.65 years

2)

NPV = Present value of cash inflows - present value of cash outflows

NPV = -10.6 + 4.4 / (1 + 0.106)^1 + 1.7 / (1 + 0.106)^2 + 1.7 / (1 + 0.106)^3 + 1.7 / (1 + 0.106)^4 + 1.7 / (1 + 0.106)^5

NPV = -1.81 million