A film studio, Nadir Productions, has to decide whether to make a movie out of the...
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A film studio, Nadir Productions, has to decide whether to make a movie out of the book "Planetary Wars," which it has acquired the rights to. The studio's experts estimate that the production costs for the film will be $30 million and the subsequent cash flows net of distribution costs and taxes to be received a year later are expected to be $60 million with a probability of 0.5 and $10 million with a probability of 0.5. The studio uses a discount rate of 20% in deciding whether to accept such projects. a. What is the NPV of the project? Should the project be accepted? At this point a new MBA on the CFO's staff suggests that they have not taken account of the option to produce a sequel to the movie. If the movie succeeds at the box office, then surely they will want to make "Planetary Wars II" the following year. b. Draw a decision tree for the project. c. Assuming that the cost estimates and the distribution of future cash flows for the sequel are the same as for the original movie, how does taking account of the option to make a sequel affect the desirability of the project? d. Suppose that Nadir's executives believe that a successful film of this genre can have as many as three sequels. What is the NPV of the project taking account of this? A film studio, Nadir Productions, has to decide whether to make a movie out of the book "Planetary Wars," which it has acquired the rights to. The studio's experts estimate that the production costs for the film will be $30 million and the subsequent cash flows net of distribution costs and taxes to be received a year later are expected to be $60 million with a probability of 0.5 and $10 million with a probability of 0.5. The studio uses a discount rate of 20% in deciding whether to accept such projects. a. What is the NPV of the project? Should the project be accepted? At this point a new MBA on the CFO's staff suggests that they have not taken account of the option to produce a sequel to the movie. If the movie succeeds at the box office, then surely they will want to make "Planetary Wars II" the following year. b. Draw a decision tree for the project. c. Assuming that the cost estimates and the distribution of future cash flows for the sequel are the same as for the original movie, how does taking account of the option to make a sequel affect the desirability of the project? d. Suppose that Nadir's executives believe that a successful film of this genre can have as many as three sequels. What is the NPV of the project taking account of this?
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The NPV Net Present Value of a project is the difference between the present value of the future cash flows and the initial investment To calculate the NPV we need to find the present value of the exp... View the full answer
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