Assume a film costs $76M to produce and to market Assume that there is a 22% cha

Question

Assume a film costs $76M to produce and to market

Assume that there is a 22% chance that a film will be a “hit” and generate $222M in sales, and a 78% chance that film will be “average” and generate $30M in sales

For any film, a sequel can be produced, either at the same time as the first film or after the sales from the first film are known

If the sequel is filmed at the same time as the original film, the cost is $95M

If the sequel is filmed after the original film, the cost will be $122M

If a sequel is produced, it has a 90% chance of generating the same sales as the original film, and a 10% chance to have the opposite result (i.e., a 10% chance for the sequel of a “hit” to be only “average”, and a 10% chance for the sequel for an “average” film to become a surprise “hit”).

If it is decided in advance that both a film and its sequel will be produced at the same time, what is the expected net value after for the two films? Choose the answer that is closest to correct.

–$39M

–$16M

–$12M

$14M

$20M

–$39M

–$16M

–$12M

$14M

$20M

Explanation / Answer

Here in this case, both the film and its sequel is produced at the same time cost = $ 95 M

Produce and market cost = $76M

so Total cost = $ 95M + $76M = $171 M

Here P(Hit) = 0.22 and Total revenue for hit = $222M

P(Average) = 0.78 and total revenue for average = $ 30 M

so if original has the same sales as sequal, its probability = 0.9

original has opposite sales as squal, its probability = 0.1

so Total revenue = 0.22 * 222 + 0.22 * 0.9 * 222 + 0.22 * 0.10 * 30 + 0.78 * 30 + 0.78 * 0.10 * 222 + 0.78 * 0.90 * 30 = $ 155.232

so Expected profit or loss = $ 155.232 - $ 171 = -$16M

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