Question

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 $4.3 million in the year it is released and $1.8 million for the following four years. What is the payback period of this investment? If you require a payback period of two years, will make the movie? Does the movie have positive NPV if the cost of capital is 10.5%? you What is the payback period of this investment? The payback period is years. (Round to one decimal place.) If you require a payback period of two years, will you make the movie? (Select from the drop-down menu.) 8 19 Does the movie have positive NPV if the cost of capital is 10.5%? 20 If the cost of capital is 10.5%, the NPV is $ 21 million. (Round to two decimal places.) 22 23 24

Answer 1

The payback period is computed as shown below:

The payback period is the period in which we are able to recover our initial investment

Initial investment = $ 10.2 million

Cumulative cash flows for four years will be as follows:

= $ 4.3 million + $ 1.8 million x 3 years

= $ 9.7 million

So the payback period will be:

= 4 years + remaining investment to be recovered / next years cash flow

= 4 years + ( $ 10.2 million - $ 9.7 million ) / $ 1.8 million

= 4.3 years Approximately

No we will not make the movie if the payback period is 2 years since the payback period is greater than 2 years.

The NPV is computed as shown below:

= - $ 10.2 million + $ 4.3 million / 1.105 + $ 1.8 million / 1.105² + $ 1.8 million / 1.105³ + $ 1.8 million / 1.105⁴ + $ 1.8 million / 1.105⁵

= - $ 1.20 Approximately

As can be seen that the project does not have positive NPV.

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