Question

d to cost $10.8 million upfront and You are considering making a movie. The movie is ex take a year to make. After that, it is expected to make $4.4 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? A. B. C. D. WHAT IS THE PAYBACK PERIOD OF THIS INVESTMENT? BASED ON THE PAYBACK PERIOD REQUIREMENT, WOULD YOU MAKE THIS 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

Year	period	cash flow	cumulative cash flow
1	0	-10.8
2	1	4.4	4.4
3	2	1.7	6.1
4	3	1.7	7.8
5	4	1.7	9.5
6	5	1.7	1.3	amount to be recovered
	Payback period	year before final recovery +(amount to be recovered/cash flow of the year)	4+(1.3/1.7)	4.76
	On the basis of payback period project would not be selected as PBP is greater than the ideal PBP of 2
	Year	cash flow	present value of cash flow = cash flow/(1+r)^n r = 10.6%
	1	-10.8	-9.764919
	2	4.4	3.5970164
	3	1.7	1.2565609
	4	1.7	1.136131
	5	1.7	1.0272432
	6	1.7	0.9287913
	NPV	sum of present value of cash flow	-1.819176
	on the basis of NPV project would not be accepted as NPV is negative