Metro-Goldwyn-Mayer, Inc. (MGM), is a major producer and distributor of theatrical and television filmed entertainment. Regarding theatrical films, MGM states, “Our feature films are exploited through a series of sequential domestic and international distribution channels, typically beginning with theatrical exhibition. Thereafter, feature films are first made available for home video generally six months after theatrical release; for pay television, one year after theatrical release; and for syndication, approximately three to five years after theatrical release.”
Assume that MGM releases a film that cost $100 million (excluding depreciation) and grosses $125 million at the box office in 2006. The film requires $40 million of advertising during the release. One year later, by the end of 2007, the film is expected to earn MGM $90 million in home video sales at a net cash margin of 30% of sales. By the end of 2008, the film is expected to earn MGM $20 million from pay TV; and by the end of 2009, the film is expected to earn $5 million from syndication.
a. Determine the net present value of the film if the desired rate of return is 20%. Use the table of present value of $1 appearing in Exhibit 1 of this chapter. Round to the nearest whole million dollars.
b. Under the assumptions provided here, is the film expected to be financially successful?