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You are considering making a movie. The movie is expected to cost $10 million upfront and take a year to make. After that, it is expected t
is released and $2 million for the following four years. What is the payback period of this investment? If your equire a payback period of tw
movie? Does the movie have positive NPV if the cost of capital is 10%?
Year

Cash Flow
Cumulative Cash Flow
0 -$10,000,000
-$10,000,000
1 $5,000,000
-$5,000,000
2 $2,000,000
-$3,000,000
3 $2,000,000
-$1,000,000
4 $2,000,000
$1,000,000
5 $2,000,000
$3,000,000

Since cumulative cash turned positive in year 4 so the payback period would be between 3 to 4 years.
Payback Period = 3+1000000/2000000 = 3.5 Year
Since the payback period is 3.5 years and the required payback period is 2 years we will not make the movie.
Year

Cash Flow
PV factor @ 10%
Present Value
0 -$10,000,000
1 -$10,000,000
1 $5,000,000
0.90909 $4,545,455
2 $2,000,000
0.82645 $1,652,893
3 $2,000,000
0.75131 $1,502,630
4 $2,000,000
0.68301 $1,366,027
5 $2,000,000
0.62092 $1,241,843
NPV

$308,846

Yes the movie has a positive NPV of $308,846

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make. After that, it is expected to make $5 million in the year it

r equire a payback period of two years, will you make the

ween 3 to 4 years.

e will not make the movie.

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