242100643-FIN515-Homework5.pdf - Colton Lane Charlson Managerial Finance Assignment 5 Problem 7-20 Year 0 1 2 3 4 5 Cash Flow-10,000,000 5,000,000

242100643-FIN515-Homework5.pdf - Colton Lane Charlson...

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Colton Lane Charlson September 29, 2014 Managerial Finance Assignment 5 Problem 7-20 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 Payback Period = 3.5 Years Since the payback period is 3.5 years and the required payback period is 2 years we will not make the movie. Year Cash Flow PV Factor @ 10% Present Value 0 -10,000,000 1 -10,000,000 1 5,000,000 (1 / 1.1) = .90909 4,545,455 2 2,000,000 (.90909 / 1.1) = .82645 1,652,893 3 2,000,000 (.82645 / 1.1) = .75131 1,502,630 4 2,000,000 (.75131 / 1.1) = .68301 1,366,027 5 2,000,000 (.68301 / 1.1) = .62092 1,241,843 TOTAL $308,848 Yes the movie has a positive NPV of $308,848. Problem 7-21 a) IRR Project A NPV: (2/r) 10 = 0 Project A IRR = 20% Project B NPV: (1.5 / (r-.02)) 10 = 0 .15 = r - .02 Project B IRR = 17%
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