MGM Holdings (MGMB) operates Metro-Goldwyn-Mayer Studios Inc. and is a major producer and distributor of movie and television filmed entertainment. Regarding movies (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 (online downloads) 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 produces a movie (film) during early 20Y5 at a cost of $340 million and releases it halfway through the year. During the last half of 20Y5, the movie earns revenues of $420 million at the box office. The movie requires $90 million of advertising during the release. One year later, by the end of 20Y6, the movie is expected to earn MGM net cash flows from online downloads of $60 million. By the end of 20Y7, the movie is expected to earn MGM $20 million from pay TV, and by the end of 20Y8, the movie is expected to earn $10 million from syndication.

a. Determine the net present value of the film as of the beginning of 20Y5 if the desired rate of return is 20%. To simplify present value calculations, assume that all annual net cash flows occur at the end of each year. Use the present value table appearing in Exhibit 2 of this chapter. Round to the nearest whole million dollars.

b. Under the assumptions provided here, is the film expected to be financially successful? Explain.