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
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  • Spring '10
  • Unknown
  • Net Present Value, 4 years, 2¬†years, 3.5 years, $4,545,455, 3.5 Year

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