Question

Please show process and formulas used

You are considering making a movie. The movie is expected to cost$10.9 million up front and take a year to produce. After​ that, it is expected to make $4.5 million in the year it is released and $2.1million 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 is10.4%​?

Answer 1

Solution

Year	(cash flows in millions)
Annual Cash Flow	Cumulative Cash Flow
0	(10.90)	(10.90)
1	4.50	(6.40)
2	2.10	(4.30)
3	2.10	(2.20)
4	2.10	(0.10)
5	2.10	2.00

Payback Period = 4 + 0.10/2.10 = 4 + 0.0476 ≈ 4.0476 years or rounded off to 4.05 years

If you require a payback period of two​ years, we will not make the movie.because Payback period of investment is 4.0476 years which is more than Required payback period of 2 years.