You are considering making a movie. The movie is expected to cost $10.2 million up front and take a year to produce. After that, it is expected to make $4.1
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 10.4%?
| Payback | ||||
| Year | Cashflows | Cumulative CF | ||
| 0 | -10200000 | -10200000 | ||
| 1 | 4100000 | -6100000 | ||
| 2 | 1700000 | -4400000 | ||
| 3 | 1700000 | -2700000 | ||
| 4 | 1700000 | -1000000 | ||
| 5 | 1700000 | 700000 | ||
| Payback = 4 yrs + 1000000/1700000 = 4.59 years | ||||
| NPV | ||||
| Year | Cashflows | PVF at 10.4% | Present values | |
| 0 | -10200000 | 1 | -10200000 | |
| 1 | 4100000 | 0.905797 | 3713768 | |
| 2 | 1700000 | 0.820468 | 1394796 | |
| 3 | 1700000 | 0.743178 | 1263402 | |
| 4 | 1700000 | 0.673168 | 1144386 | |
| 5 | 1700000 | 0.609754 | 1036582 | |
| Net Present value | -1647065 | |||
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