Questions on the Project

1. Accounting Return Analysis

Estimate the operating income from the proposed studio investment to Netflix

over the next 10 years.

Estimate the after-tax return on capital for the investment over the 10-year

period.

Based upon the after-tax return on capital, would you accept or reject this

project?

This will require you to make some assumptions about allocation and expensing. Make

your assumptions as consistent as you can and estimate the return on capital.

2. Cash Flow Analysis

Estimate the after-tax incremental cash flows from the proposed studio

investment to Netflix over the next 10 years.

If the project is terminated at the end of the 10th year, and both working

capital and investment in other assets can be sold for book value at the end of

that year, estimate the net present value of this project to Netflix. Develop a

net present value profile and estimate the internal rate of return for this

project.

If the studio is expected to have a life much longer than 10 years, estimate the

net present value of this project, making reasonable assumptions about

investments needed and cash flows.

3. Sensitivity Analysis

Estimate the sensitivity of your numbers to changes in at least three of the key

assumptions underlying the analysis (You get to pick what you think are the

three key assumptions).

Based upon your analysis, and any other considerations you might have, tell me whether

you would accept this project or reject it. Explain, briefly, your decision.