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You are considering making a movie
You are considering making a movie. The movie is expected to cost $100 million upfront and takes a year to make. After that, it is expected to make $83 million in the first year it is released and $8 million for the following 20 years. Your cost of capital is 10%.
a.) What is the payback period of this investment? (Hint: consider that you look upfront at this, that is from year=0. For solving this task it is necessary to consider carefully the timeline of the cash flows in years=0,1,2,3,....,21,22)
The payback period is ___ years. (round to a full year)
b.) If you require a payback period of two years, will you make the movie?
Answer: (fill in "yes" or "no")
c.) What is the NPV of this project?
The NPV is $ million. (round to two decimals)
d.) According to the NPV rule, should you make the movie?
Answer: (fill in "yes" or "no")
Expert Solution
| a] | Year | Cash Flow [$ million] | Cumulative Cash Flow | ||
| 0 | $ (100.00) | $ (100.00) | |||
| 1 | $ 83.00 | $ (17.00) | |||
| 2 | $ 8.00 | $ (9.00) | |||
| 3 | $ 8.00 | $ (1.00) | |||
| 4 | $ 8.00 | $ 7.00 | |||
| 5 | $ 8.00 | $ 15.00 | |||
| 6 | $ 8.00 | $ 23.00 | |||
| Payback period = 3+1/8 = Rounded off to 4 Years | |||||
| b] | N0 | ||||
| As the payback period of this project is more than | |||||
| the maximum permissible payback, the move will | |||||
| not be made. | |||||
| c] | NPV = -100+83/1.1+8*(1.1^20-1)/(0.1*1.1^20)/1.1 = | $ 37.37 | million | ||
| d] | Yes | ||||
| The investment should be made as the NPV is positive. |
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