Question

You are considering making a movie. The movie is expected to cost $10.5 million upfront and take a year to make. After that, it is expected to make $4.1 million in the first year it is released (end of year 2) and $1.9 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? What is the payback period of this investment? The payback period is years. (Round up to nearest integer.)

Answer 1

YEAR	CASH FLOW	Discounted cash flow	Cumulative cash flow	Cumulative discounted cash flow
0	-10500000	-10500000	-10500000	-10500000
1	0	0	-10500000	-10500000
2	4100000	3351765.318	-6400000	-7148234.682
3	1900000	1404391.59	-4500000	-5743843.093
4	1900000	1269793.481	-2600000	-4474049.612
5	1900000	1148095.372	-700000	-3325954.24
6	1900000	1038060.915	1200000	-2287893.326

hence

payback period = 5 +  700000/1900000

= 5.37

No, since payback is greater than 2 years

NPV = sum of discounted cash flows = -2287893.33

No, Since NPV is negative