Question

You are considering making a movie. The movie is expected to cost $10.8 million upfront and take a year to make. After​ that, it is expected to make

$4.8 million in the first year it is released​ (end of year​ 2) and $2.1 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 10.8%​?
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.)
Based on the payback period​ requirement, would you make this​movie?
What is the NPV of the movie if the cost of capital is 10.8 %​? The NPV is ______ million. ​ (Round to three decimal​ places.)
According to the NPV​ rule, should you make this​ movie?
According to the NPV rule you should (make ,not make )the movie.

Answer 1

Answer:

Payback period = 3.57 years; No, dont make the movie based on payback period of 2years

NPV=$1.479 million; Yes, make the movie based on NPV is positive

Explanation:

The movie will show sign of recovering after the end of the 3rd year.

Therefore, Payback period = 3 + (1.2/2.1)

Payback period = 3 + 0.57

Payback period = 3.57

No, I would not make the movie if i require a payback period of 2years.

NPV = -(10.8/1.108)+(4.8/1.108²)+(4.8/1.108³)+(2.1/1.108⁴)+(2.1/1.108⁵)+(2.1/1.108⁶)

NPV = -9.747+3.91+3.529+1.393+1.2575+1.136

NPV=$1.479 million

Yes, make the movie since NPV is positive.