Question

XP 8-27 (similar to) * Question Help You are considering making a movie. The movie is expected to cost $10.3 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 $1.8 million for the following four years. What is the payback period of this investment? If you require a payback period of two years, will you make the movie? Does the movie have positive NPV if the cost of capital is 10.9%? What is the payback period of this investment? The payback period is years. (Round to one decimal place.)

Answer 1

1.
Payback period=1+(10.3-4.1)/1.8=4.444444444 years

2.
If payback threshold is 2 years, dont make as payback is more

3.
NPV=-10.3+4.1/1.109+1.8/1.109^2+1.8/1.109^3+1.8/1.109^4+1.8/1.109^5=-1.556675937

No NPV is negative