Question

You are considering making a movie. The movie is expected to cost $10.6 million upfront and take a year to make. After? that, it is expected to make $4.8 million in the first year it is released? (end of year? 2) and $2.2 million for the following four years? (end of years 3 through? 6) . What is the payback period of this? investment? If you require a payback period of two? years, will you make the? movie? What is the NPV of the movie if the cost of capital is 10.2%?? According to the NPV? rule, should you make this? movie?

Answer 1

Project A		Year	Amount		P V [email protected]%	Present Value
Cash outflow		0	10.6		1	10.60
				Cumulative Factor
Cash inflow		1	0	0	0.91	0.00
Cash inflow		2	4.8	4.8	0.82	3.95
Cash inflow		3	2.2	7	0.75	1.64
Cash inflow		4	2.2	9.2	0.68	1.49
Cash inflow		5	2.2	11.4	0.62	1.35
Cash inflow		6	2.2	13.6	0.56	1.23
				NPV is negative		-0.93

As per the NPV rule I should not make the movie because here NPV comes negative

The PAyback period is

Pay Back Period
Cash outflow = 10.6
As 9.2 cover in 4 years so 4 years complete
0.8/2.2*12	=	4.36
4 years complete and 4.36 months

No we can not make the movie as per Payback period rule also because it is more than 2 years