You are considering making a movie. The movie is expected to cost $10.6 million up front and take a year to produce. After that, it is expected to make $4.2 million in the year it is released and $1.7 million for the following four years. What is the payback period of this investment? If you require a payback period of two years, will you make the movie? Does the movie have positive NPV if the cost of capital is 10.1%? www

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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**Investment Analysis of a Movie Project**

*Scenario Overview*:
You are considering making a movie. The project involves an upfront cost of $10.6 million and will take a year to produce. Upon its release, the movie is expected to generate $4.2 million in the first year and $1.7 million annually for the following four years.

*Key Questions*:
1. **What is the payback period of this investment?**
   - The payback period for this investment is calculated to be **0.98 years**. (Rounded to two decimal places.)

2. **If you require a payback period of two years, will you make the movie?**
   - The calculated payback period of 0.98 years is less than the required two years, indicating that your criterion is met.

3. **Does the movie have a positive Net Present Value (NPV) if the cost of capital is 10.1%?**
   - To determine if the NPV is positive, calculate the present value of future cash flows and compare it to the initial investment using the given cost of capital. This requires a separate NPV calculation not directly provided in the text.

**Conclusion**:
This financial analysis provides insights into the movie’s payback period, guiding you on whether to proceed based on your financial benchmarks. Further NPV analysis is recommended to complete the investment appraisal.
Transcribed Image Text:**Investment Analysis of a Movie Project** *Scenario Overview*: You are considering making a movie. The project involves an upfront cost of $10.6 million and will take a year to produce. Upon its release, the movie is expected to generate $4.2 million in the first year and $1.7 million annually for the following four years. *Key Questions*: 1. **What is the payback period of this investment?** - The payback period for this investment is calculated to be **0.98 years**. (Rounded to two decimal places.) 2. **If you require a payback period of two years, will you make the movie?** - The calculated payback period of 0.98 years is less than the required two years, indicating that your criterion is met. 3. **Does the movie have a positive Net Present Value (NPV) if the cost of capital is 10.1%?** - To determine if the NPV is positive, calculate the present value of future cash flows and compare it to the initial investment using the given cost of capital. This requires a separate NPV calculation not directly provided in the text. **Conclusion**: This financial analysis provides insights into the movie’s payback period, guiding you on whether to proceed based on your financial benchmarks. Further NPV analysis is recommended to complete the investment appraisal.
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