Question

You are considering making a movie. The movie is expected to cost $10.5 million up front and take a year to produce. After that, it is expected to make $4.7 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 5.3 years. (Round to one decimal place.) If you require a payback period of two years, will you make the movie? No . (Select from the drop-down menu.) Does the movie have positive NPV if the cost of capital is 10.9%? If the cost of capital is 10.9%, the NPV is $1 million. (Round to two decimal places.)

Answer 1

Payback period is the time period in which the initial investment is recovered

= 2 + (10.5 million - 4.7 million)/1.8 million

= 5.222 years

i.e. 5.2 years

No, since the payback period is higher

NPV = present value of cash inflows - present value of cash outflows

= -10.5 million + 4.7 million*PVF(10.9%, 2 years) + 1.8 million *PVAF(10.9%. 3-6 years)

= -10.5 million + 4.7 million*0.8131 + 1.8 million*2.528

= -$2.12803 million

i.e. -2.13 million

No, negative NPV