Will Avatar 3 be a financial success???

Submitted to:

Hussain Ahmed Enamul Huda

Assistant Professor

Department of Finance

Faculty of Business Studies

University of Dhaka

Submitted by:

Group 09

Section- C (26th Batch)

Department of Finance

Faculty of Business Studies

University of Dhaka

Submission Date: February 26, 2023

1
 Group 09

Section- C (26th Batch)

Department of Finance

Faculty of Business Studies

University of Dhaka

Sl No. Name ID Remarks

01 Ajnin Jamal Chowdhury Jinia 26-087

02 Emarson Rafi 26-209

03 Md. Minhazul Islam 26-113

04 Taslima Akter Priya 26-075

05 Syed Taj Ali Fardin 26-158

2
 Table of Contents

Executive summary..........................................................................................................4

Case Background.............................................................................................................5

Revenue of Avatar and Avatar 2 Movies..........................................................................7

Cost of Avatar and Avatar 2 Movies.................................................................................8

Break-Even Analysis........................................................................................................9

Scenario Planning..........................................................................................................10

Beta Calculation.............................................................................................................11

Required Rate of Return (RRR).....................................................................................12

Conflicting thoughts........................................................................................................13

References.....................................................................................................................14

3
Executive summary

Avatar is a 2009 epic science fiction film directed, written, co-produced, and co-edited by James
Cameron, and Avatar: The Way of Water is a 2022 American epic science fiction film directed
and produced by the same person. We have prepared a financial case for the success of Avatar 3
based on the information about these two movies. We have tried to provide data for the
estimation of beta calculation, the required rate of return (RRR), break-even, scenario planning,
and sensitivity analysis of the project using information about the financial performance, cash
flow of revenue and expenditure, production budget and marketing cost, and business model of
the movies. There are also some conflicting thoughts and possible alternatives to the two movies.

The previous two Avatar movies have been highly successful at the box office, grossing a
combined total of over $4 billion worldwide. Therefore, it is reasonable to assume that there will
be a significant amount of interest in the third installment, and it has a good chance of being
financially successful as well.

4
Case Background
The first sequel of the Avatar franchise, which was launched in 2009, was indeed a commercial
triumph, generating more than $2.7 billion all over the world. The film had a budget of $237
million to make and was developed and released by 20th Century Fox, which was subsequently
purchased by the Walt Disney Company in the year, 2019. Avatar 1 shattered a number of
records at the box office, including the title of the highest-grossing film of all time, at the time it
was released. The film also received widespread recognition for its breathtaking visuals and
immersive world-building.

Avatar 2, which premiered in 2021, proved to be a commercial success, earning more than $1.8
billion in revenue all around the world. The Walt Disney Corporation was responsible for both
the production and distribution of the film, which had a budget of more than $250 million.
Although the performance of Avatar 2 at the box office was not as strong as that of the first
Avatar film, it was still able to break numerous records, including the record for the highest-
grossing movie of the year 2021 and the record for the highest-grossing film released during the
COVID-19 pandemic.

Respectively, Avatar 1 and Avatar 2 were commercially successful for a variety of reasons,
which may be broken down into various categories. To begin, James Cameron, who is a well-
known and highly regarded filmmaker who has an established history of producing commercially
successful films, was the director of both of these movies. Second, both films were launched
during the Christmas season, which is traditionally a time of year when there is an increase in the
number of people who attend to the theaters. Thirdly, both films were works of science fiction,
and both were successful in their ability to capture the imaginations of viewers all over the world
thanks to the original and immersive worlds they presented.

It is important to note that the performance of Avatar 2 at the box office was hampered for a
number of reasons, including the COVID-19 epidemic as well as increasing competition from
other high-budget movies slated to be released in 2021. In spite of these obstacles, the movie was
able to have a successful opening weekend at the box office and even exceeded projections in
certain countries, such as China.

5
The financial results of Avatar 1 and 2, taken as a whole, suggest that there is scope for Avatar 3
to be a commercial success. However, it is essential to keep in mind that now the success of
Avatar 3 will be contingent on a number of factors, such as the after-effects of the COVID-19
pandemic that will have on the film industry, the level of competition from other high-budget
movies that are scheduled for release in 2023, and how audiences will respond to the film.

6
Revenue of Avatar and Avatar 2 Movies
Movie Gross Revenue Weekend Revenue

AVATAR $22,039,159,112 $134,100,226

AVATAR 2 $25,979,047,469 $77,025,481

7
Cost of Avatar and Avatar 2 Movies
Movie Production cost Marketing cost Estimated total

AVATAR $237m $150m $387m

AVATAR 2 $460m $100m $560m

Besides production and marketing costs, several other expenses related to the Avatar and Avatar
2 movies are relevant for calculating the Break Even Point (BEP) of the films. These include

Distribution Costs: It is estimated that distribution costs for a wide-release movie can range from
$35,000 to $100,000 per theater.

Insurance Costs: It is common for film productions to purchase a package policy that covers
liability, property damage, and other risks, with premiums ranging from $20,000 to $100,000 or
more.

Legal Costs: It is common for studios to budget at least $100,000 or more for legal fees for a
major film production.

Exhibitor Fees: It is estimated that exhibitor fees for a wide-release film can range from 50-60%
of the box office revenue.

These costs should be factored into the overall budget and revenue projections for the films to
calculate the Break Even Point (BEP) and assess the profitability of the productions.

8
Break-Even Analysis
A break-even analysis is a financial method that is used to assess the level of sales necessary to
cover all the variable and fixed costs connected with manufacturing and marketing an item or
service. These costs include both direct and indirect expenses. It helps analyze whether or not a
company or project is viable since it is used to compute the bare minimum revenue figure
required to achieve profitability (also known as "covering expenses")

One will need to understand all of the fixed expenses connected with manufacturing and selling a
service or product , the variable costs that are connected with manufacturing each unit of the
service or product , as well as the cost to sell the good or service, in order to calculate the point at
which you will no longer incur any losses. After then, the point at which a business is considered
to have reached "break-even" is calculated by dividing the total fixed expenses by the disparity
that exists between the unit price for sale and the unit's variable cost.

The formula for determining the point at which a business is profitable again is as follows:

The point at which a business is profitable again is defined as the total fixed costs divided by
the total revenue (Selling price per unit - Variable cost per unit)

In the context of Avatar 3, a break-even analysis can be utilized to figure out the number of sales
required to cover all the variable and fixed expenses linked with the making and distribution of
the movie, as well as the least amount of revenue required to reach a point where the movie has
achieved financial stability. A break-even analysis can be performed by assessing the production
cost, marketing and distribution expenditures, and anticipated box office income. This will allow
for the determination of whether or not the creation of Avatar 3 is financially feasible.

9
Scenario Planning
Planning is necessary for any business's survival. Scenario Planning is creating
assumption depending on inputs how the future is going to be and how the environment
of the business will change over the period. Actually, Scenario Planning is more
precisely identifying uncertainties and realities what might happen in future. Scenario
thinking, prediction, planning are the part of strategic planning that organization use to
make long-term plans. One of the biggest advantage of scenario planning is that it
examines in depth of all the possible outcomes base on realistic information’s.

Base case: To arrive at the mostly likely outcome by using the set of assumptions.

Best case: To arrive at the best outcome. Here everything will happen and goes in the
organizations way. That means the cost will be much lower and the sales well be
higher.

Worst case: It considers as the negative impact on the outcomes. For example
economic recession, higher interest rate etc. That will reduce the level of the sales.

The scenario planning can be determined in the context of Avatar 3, by anticipating the
number of sales, variable and fixed cost to find the mostly likely outcome (Base case).
Also the changes in perspective of best-case and worst-case scenario planning to
identify the best and the negative outcome of it.

10
Beta Calculation
A stock's or portfolio's beta indicates how volatile it is in comparison to the overall industry as a
whole. Volatility can also be thought of as a risk. It is an essential component of the capital asset-
pricing model, also known as the CAPM. This model is utilized to compute the anticipated return
on investment based on the investment's level of risk in comparison to the market as a whole. In
the process of calculating beta, one must first determine the returns that a stock or portfolio has
generated over a certain amount of time and then compare those returns to the returns generated
by the market as a whole. Using historical information on stock prices as well as market index
values, such as the S&P 500, is one method for accomplishing this goal.

The following is the formula that is used to calculate beta:

Beta is calculated by dividing the variance of the market's returns by the covariance of the
stock's rates of return and the market's returns.

The degree to which two or more variables, such as the stock's returns and the market's returns,
move together can obviously be measured using covariance, while the degree to which the
market's returns vary can be measured using a variance. Covariance and variance are both
measures of the same thing. We are able to determine the proportion of the stock's peril that is
attributable to market risk as well as the proportion of the stock's risk that is attributable to
idiosyncratic risk by dividing the correlation coefficients by the variance.

Beta can be determined from the perspective of Avatar 3 by contrasting the anticipated rates of
return of the film to the overall returns of the film industry or the share market. This can be
accomplished by making an estimate of the possible box office revenue that will be generated by
Avatar 3, and then comparing that figure to historical information on box office total revenue and
stock indexes for example S&P 500, or the media and entertainment index.

11
Required Rate of Return (RRR)
The Required Rate of Return (RRR) is the minimum yield that a shareholder must get on an
investment in order to offset the degree of risk. Other names for it include the discount rate, the
hurdle rate, and the minimum acceptable rate of return. It is common practice to use the required
rate of return as a benchmark when assessing the viability of a specific project or investment
opportunity. Investors may not find the venture appealing if the projected return on investment is
less than the RRR. On the other hand, if the predicted return on investment exceeds the RRR, the
venture may be viewed as appealing and worth pursuing.

The required rate of return takes a number of variables into account, including the risk-free rate
of return, the investment's associated risk premium, and the investment's time horizon. At $2.128
billion, "Avatar: The Way of Water" is the fourth-highest-grossing film in history, only behind
"Avatar" ($2.92 billion). The production budget, marketing costs, critical reception, competition
from other movies, and audience response will all have an impact on the rate of return for Avatar
3. The performance of the movie at the box office and its rate of return can be strongly impacted
by these elements. Depending on additional revenue sources like home video sales, retail sales,
and licensing agreements, the exact rate of return may change. Additionally, it's important to
note that the rate of return does not consider the time value of money, inflation, and other factors
that may affect the investment's actual value.

RRR = Risk-free rate of return + Beta X (Market rate of return - Risk-free rate of return)

Given the movie's high profile and intensive marketing effort, Avatar's claimed production
budget of roughly $237 million certainly included major marketing costs as well. Despite these
costs, the film went on to become one of the all-time highest-grossing pictures with over $2.92
billion in box office revenue during its initial theatrical release. These numbers allow one to
calculate the rate of return that movie investors received. Applying a commonly used formula to
determine rate of return, the anticipated rate of return for Avatar would be almost 440%,
meaning that for every dollar invested, investors would have received a return of about $4.40 and
for Avatar 2 it would be around 280%, lower than Avatar.

Rate of profit = ((Gross revenue - Production budget - Marketing expenses - Other costs) /
Production budget) x 100%

12
Conflicting thoughts
Some people have expressed conflicting thoughts or criticisms about the "Avatar" movies. Here
are a few common criticisms:

1. The plot is predictable or unoriginal.

2. The characters are stereotypical; Some critics have argued that the characters in "Avatar"
are overly simplistic, with little depth or nuance.
3. The film promotes a colonialist or imperialist narrative.
4. Some critics have argued that "Avatar" presents an overly simplistic message about
environmentalism, without delving into the complex social, economic, and political
factors that contribute to environmental degradation.

Some people may have different opinions about the movie. Whether or not someone enjoys
"Avatar" is a matter of personal taste and perspective. There are many alternatives to the movie,
depending on what aspects of the film were enjoyed.

13
References
Box Office Mojo (2009) Avatar, Box Office Mojo. IMDbPro -. Available at:
https://www.boxofficemojo.com/title/tt0499549/ (Accessed: February 15, 2023).

Box Office Mojo (2023) Avatar, Box Office Mojo. IMDbPro -. Available at:
https://www.boxofficemojo.com/title/tt0499549/; (Accessed: February 20, 2023)

Frew, C. (2023) Avatar 2 budget: How much did the way of water cost? Dexerto.
Dexerto. Available at: https://www.dexerto.com/tv-movies/avatar-2-budget-how-much-
did-it-cost-1982240/ (Accessed: February 25, 2023).

Szalai, G. (2019). Disney closes a $71.3 billion Fox deal, creating a global content
powerhouse, The Hollywood Reporter. The Hollywood Reporter. Available at:
https://www.hollywoodreporter.com/news/general-news/disney-closes-fox-deal-creating-
global-content-powerhouse-1174498/#! (Accessed: February 25, 2023).

Walt Disney, (2023) Investor relations: stock information, events, reports, financial
information, shareholder information The Walt Disney Company Available at:
https://thewaltdisneycompany.com/investor-relations/ (Accessed February 25, 2023).

Boxofficehttps://www.the-numbers.com/movie/Avatar;
https://www.the-numbers.com/market/2009/summary;

14