Penguin Productions is evaluating a film project: The president of Penguin estimates that the film will cost $20,000,000 to produce. In the first year, the film is expected to generate $16,500,000 in net revenue, after which the film will be released to video, Video is expected to generate $10,000,000 in net revenue in its first year, $2,500,000 in its second year and $1,000,000 in its third year. For tax purposes amortization of the cost of the film will be $12,000,000 in year 1 and $8,000,000 in year 2. The company's tax rate is 35 percent and the company requires a 12 percent rate of return on its films.
Required:
What is the net present value of the film project? To simplify, assume that all outlays to produce the film occur at time 0. Should the company Produce the film?