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 $4.6 million in the first year it is released (end of year 2) and $1.7 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 10.6%? According to the NPV rule, should you make this movie?

Answer 1

Payback Period = 1(0) + 1(4.6) + 1(1.7) + 1(1.7) + 1(1.7) + 0.53(0.9/1.7)

Payback Period = 5.53 years

As payback period is greater than 2 project should not be undertaken,

NPV = -10.4 + 4.6/(1.106)² + 1.7/(1.106)³ + 1.7/(1.106)⁴ + 1.7/(1.106)⁵ + 1.7/(1.106)⁶

NPV = -$2,49 million

Project should not be undertaken.