Question: You are considering making a movie. The movie is expected to cost $11 million upfront to make. The movie will produce cash flows of $4 million in one year, $2 million per year in each of years two, three, four and five, and then six years from today you can sell the syndication rights for $7 million in cash. Ignore taxes.
a. What is the payback period of the investment? Should you make the movie if the threshold payback period is 3 years?
b. If the appropriate discount rate is 9%, what is the NPV of the investment? Should you make the movie?
c. What is the IRR of the movie? d. What is the Profitability Index of the movie if the appropriate discount rate is 9%?