FIN515_Homework5_ - 7-20 What is the payback period of this investment If you require a payback period of two years will you make the movie Does the

# FIN515_Homework5_ - 7-20 What is the payback period of this...

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7-20. - What is the payback period of this investment? - If you require a payback period of two years, will you make the movie? - Does the movie have positive NPV if the cost of capital is 10%? Year Cash Flow Cumulative Cash Flow 0 -\$10,000,000 -\$10,000,000 1 \$5,000,000 -\$5,000,000 2 \$2,000,000 -\$3,000,000 3 \$2,000,000 -\$1,000,000 4 \$2,000,000 \$1,000,000 5 \$2,000,000 \$3,000,000 Since cumulative cash turned positive in year 4 so the payback period would be between 3 to 4 years. - Payback Period = 3+1000000/2000000 = 3.5 Year - Since the payback period is 3.5 years and the required payback period is 2 years recommendation will be NOT make the movie. Year Cash Flow PV factor @ 10% Present Value 0 - \$10,000,00 0 1 -\$10,000,000 1 \$5,000,000 0.90909 \$4,545,455 2 \$2,000,000 0.82645 \$1,652,893 3 \$2,000,000 0.75131 \$1,502,630 4 \$2,000,000 0.68301 \$1,366,027 5 \$2,000,000 0.62092 \$1,241,843 - Yes the movie has a positive NPV of \$308,846 7-21. Answers: a. NPVa = 2/r – 10 Setting NPVb = 0 and solving for