A) What is the Pay back period in years?
A) Payback Period = ( Last Year with a Negative Cash Flow ) + [( Absolute Value of negative Cash Flow in that year)/ Total Cash Flow in the following year)]
= 4 + ( 0.30 / 2.10)
= 4.14 years
Hence the correct answer is 4.14 years
Note:
Year | Investment | Cash Inflow | Net Cash Flow | |
0 | -10.80 | - | -10.80 | (Investment + Cash Inflow) |
1 | - | 4.20 | -6.60 | (Net Cash Flow + Cash Inflow) |
2 | - | 2.10 | -4.50 | (Net Cash Flow + Cash Inflow) |
3 | - | 2.10 | -2.40 | (Net Cash Flow + Cash Inflow) |
4 | - | 2.10 | -0.30 | (Net Cash Flow + Cash Inflow) |
5 | - | 2.10 | 1.80 | (Net Cash Flow + Cash Inflow) |
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The correct answer is No.
Note: Since the actual payback period is more than the required payback period , the movie would not be made.
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NPV = Present Value of Cash Inflows - Present Value of Cash Outflows
= [ $ 4.2 * 1/ ( 1.105) ^ 1 + $ 2.10* 1/ ( 1.105) ^ 2 + $ 2.10* 1/ ( 1.105) ^3+ $ 2.10* 1/ ( 1.105) ^4+ $ 2.10* 1/ ( 1.105) ^5] - $ 10.80
= - $ 1.04 Million
The movie has a negative NPV.
The correct answer is No.
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