Regarding theatrical films, MGM states Our feature films are exploited through a

Question

Regarding theatrical films, MGM states Our feature films are exploited through a series of sequential                    domestic and international distribution channels, typically beginning with a theatrical exhibition. Thereafter feature films are first made available for home                    video generally six months after theatrical release; for pay television, one year after theatrical release; and for syndication, approximately three to five                    years after theatrical release.

Assume that MGM produces a film during early 2012 at a cost of $300 million ($300,000,000), and releases it                    halfway through the year. During the last half of 2012, the film earns revenues of $350 million ($350,000,000) at the box office. The film requires $75 million                    ($75,000,000) of advertising during the release. One year later, by the end of 2013, the film is expected to earn MGM net cash flows from home video sales of                    $45 million ($45,000,000). By the end of 2014, the film is expected to earn MGM $30 million ($30,000,000) from pay TV; and by the end of 2015 the film is                    expected to earn $10 million ($10,000,000) from syndication.

Required:

1. Determine the net present value of the film as of the beginning of 2012 if the desired rate of return is                    20%. To simplify the present value calculations, assume all annual net cash flows occur at the end of each year. Present your answer as an EXCEL                    spreadsheet.

                    Calculate the total cash flows from the release of the movie for the year 2012. These will include:                

Explanation / Answer

1.                  CALCULATION OF NPV

YEAR       CASHFLOW                    PV@20%

2012         (300-350+75)                       (20.83)

2013         45                                          31.2

2014         30                                          17.4

2015              10                                                                4.82

SO NPV=31.2+17.4+4.82-20.83=$32.59 MILLION

TOTAL CASH FLOW FOR 2012

GROSS TICKET SALES=350

PRODUCTION COST=300

MARKETING COST=75

TOTAL=$(25) MILLION

2.TOTAL CASH FLOW FROM HOME VIDEO SALES FOR 2013=$45 MILLION

3.TOTAL REVENUE FROM PAY TV RELEASES FOR 2014=$30 MILLION

4.TOTALREVENUE FROM SYNDICATION RELEASES FOR 2015=$10 MILLION

AS THE NPV IS PPOSITIVE THE STUDIO IS RECCOMENDED TO MAKE THE FILM

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