Question

You are considering making a movie. The movie is expected to cost $ 10.1 million up front and take a year to produce. After​ that, it is expected to make $ 4.1 million in the year it is released and $ 2.1 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 10.5 %​?

Answer 1

Project
Year	Cash flow stream	Cumulative cash flow
0	-10.1	-10.1
1	0	-10.1
2	4.1	-6
3	2.1	-3.9
4	2.1	-1.8
5	2.1	0.3
6	2.1	2.4
Payback period is the time by which undiscounted cashflow cover the intial investment outlay
this is happening between year 4 and 5
therefore by interpolation payback period = 4 + (0-(-1.8))/(0.3-(-1.8))
4.86 Years
Reject project as payback period is more than 2 years

Project
Discount rate	0.105
Year	0	1	2	3	4	5	6
Cash flow stream	-10.1	0	4.1	2.1	2.1	2.1	2.1
Discounting factor	1	1.105	1.221025	1.349233	1.4909021	1.647447	1.820429
Discounted cash flows project	-10.1	0	3.357835	1.55644	1.4085432	1.2747	1.153574
NPV = Sum of discounted cash flows
NPV Project =	-1.35
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
NPV is negative