@Do Homework-Gabriel Pacheco- Internet Explorer Thomeworkld 450472133questionld-

Question

@Do Homework-Gabriel Pacheco- Internet Explorer Thomeworkld 450472133questionld-18flushed false&icld; 4720909&centerwinsyes; MGMT 326-Fundamentals of Corporate Finance-Berk/DeMarzo Gabriel Pacheco& 4/8/18 10:55 AM Homework: Chapter 8 Homework Save 9 of 16 (6 complete) Score: 0 of 1 pt P 8-27 (similar to) You are considering making a movie. The movie is expected to cost $10. million up front and take a year to produce. Ater that, i is expected to make $42 million in HW Score: 34.38%, 5.5 of 16 pts ?? Quest on Help | * the year i is released and $2.1 mion for the following four years What is the payback period of this investment? If you require a payback period of two years, wll you make the movie? Does the movie have positive NPV if the cost of capital is 10 4%? What is the payback period of this investment? The payback period is years. (Round to one decimal place.) Enter your answer in the answer box and then click Check Answer Clear A

Explanation / Answer

Answer 1

Payback period = Years before full recovery + ( Uncovered cost at the start of the year / Cash flow during the year)

= 4 + [ ($10.70 - $10.50) / $2.1] = 4.1 years

Answer 2

No , I will not make the movie if the required payback period is 2 years

Explanation : Since from the above table we can see that in 2 years the movie will generate a cumulative cash flow of $6.3 miliions . Thus $4.4 millions (10.7 - 6.3) will be short if the required payback is 2 years.

Answer 3 : No , the movie does not have a positive NPV at 10.4 %

Explanation :

Computation of NPV

Initial Investment = $10.70 million Years Cash Flow miliion  ($) Cumulative Cash Flow miliion ($) 1 4.2 4.2 2 2.1 6.3 3 2.1 8.4 4 2.1 10.5 5 2.1 12.6

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