The payback period is the period in which we are able to recover our initial investment.
So for $ 10 million to recover, it will take
$ 5 million + $ 2 million + $ 2 million + remaining $1 million
= $ 9 million + remaining $ 1 million
= 3 years + remaining $ 1 million / next year cash flow
= 3 years + remaining $ 1 million / $ 2 million
= 3.5 years
If we require a payback period of two years, we shall not make the movie since the payback period is more than 2 years.
NPV is computed as shown below:
= - $ 10 million + $ 5 million / 1.101 + $ 2 million / 1.102 + $ 2 million / 1.103 + $ 2 million / 1.104 + $ 2 million / 1.105
= $ 0.3088 million
Yes the movie has positive NPV if the cost of capital is 10%
Feel free to ask in case of any query relating to this question
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