Suppose that you calculated the NPV of the two year run of the movie as $43 mill
ID: 2733917 • Letter: S
Question
Suppose that you calculated the NPV of the two year run of the movie as $43 million. After the last run of the movie in theaters, New Line plans to sign an exclusive streaming deal with Netflix. Estimated cash flows from this continuation of the project are $4 million starting in year 3, growing by 2% forever. New Line's cost of capital is 12%. What is the total present value of the movie incorporating the theatre run and streaming? The answer is $74.89 million but I do not know how to arrive to the answer.
Explanation / Answer
Answer: Estimated cash flows from this continuation of the project are $4 million starting in year 3 than value of year 2:
Price 2=CF of year 3/(cost of capital-Growth rate)
=$4/(0.12-0.02)
=$40 million
PV =$40*(1/1.12)^2
=$31.89 million
The total present value of the movie incorporating the theatre run and streaming is:
Total PV =$43 million+31.89 million
=$74.89 million
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