Use the information below to answer questions
Fabulous Films is reviewing several screenplays in selecting the next film that it will produce. Each film will generate (cash) revenues each year from different sources. In the first year, revenues will be generated from box office ticket sales and, in subsequent years, from licensing fees for TV broadcast, pay-per-view fees, DVD sales and so on. Of course various expenses will also be incurred. Besides the initial cost of production, there will be subsequent (cash) expenditures related to the marketing and distribution of each film. Relevant data for each film project are provided in the table below:
Film Project Cat Farm Best Friends Forever Ashley & Garfield
Cost of Production € 30.000.000 € 20.000.000 € 50.000.000
Cost of capital 5% 7% 10%
Year 1: Expected net cash flows € 11.000.000 € 10.500.000 € 32.000.000
Year 2: Expected net cash flows € 9.000.000 € 6.000.000 € 20.000.000
Year 3: Expected net cash flows € 7.000.000 € 5.000.000 € 8.000.000
Year 4: Expected net cash flows € 5.000.000 € 3.000.000 € 5.000.000
1. Calculate the NPV of the film, "Cat Farm"
2. Calculate the NPV of the film, "Best Friends Forever"
3. Calculate the NPV of the film, "Ashley and Garfield: A Love Story"
4. Based on your calculations, which film do you believe Fabulous Films should produce? Briefly explain your decision.