The CEO of Garneau Cinemas is considering making a movie and must decide between acomedy and a thriller-it doesn't have the production space to make both. The comedy isexpected to cost $20 million up front (at t = 0). After that, it is expected to make $11 millionin the first year (at t = 1) and $4 million in each of the following two years (at t = 2 and t =3). In the fourth year (at t = 5), it is expected that the movie can be sold into syndicationfor $2 million with no further cash flows back to Garneau Cinemas. The thriller is expectedto cost $45 million up front (at t = 0). After that, it is expected to make $25 million in thefirst year (at t = 1) and $4 million in each of the following four years (at t = 2, 3, 4, and 5).In the sixth year (at t = 6), it is expected that the movie can be sold into syndication for$30 million with no further cash flows back to Garneau Cinemas. The cost of capital is10%, and Garneau usually requires projects to have a payback within four years.Determine each project's payback and NPV, and advise the CEO what she should do.years, and the NPV of the comedy is $years, and the NPV of the thriller is $The payback for the comedy isThe payback for the thriller is(Round to two decimal places as needed.)million.million.

NPV stands for Net Present Value. It is a financial metric used to assess the profitability and…

Answered: The CEO of Garneau Cinemas is…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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You are considering making a movie. The movie is expected to cost 10.6 million up front and take a year to produce. After that, it is expected to make $4.7 million in the year it is released and $1.8 million for the following four years. What is the payback period of this investment? If you require a payback period of two years, will you make the movie? Does the movie have positive NPV if the cost of capital is 10.9% ?
Southern Tours is considering acquiring Holiday Vacations. Management believes Holiday Vacations can generate cash flows of $218,000, $224,000, and $231,000 over the next three years, respectively. After that time, they feel the business will be worthless. If the desired rate of return is 11.5 percent, what is the maximum Southern Tours should pay today to acquire Holiday Vacations? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Johnson Entertainment Systems is setting up to manufacture a new line of video game consoles. The cost of the manufacturing equipment is $4,750,000. Expected cash flows over the next four years are $725,000, $850,000, $1,200,000, and $1,500,000. Given the company's required rate of return of 15 percent, should Johnson system cept this project? Why? (Do not round intermediate computations. Round final answer to nearest dollar.) O No, the project should be rejected because IRR is greater than the cost of capital O Yes, the project should be accepted because IRR is greater than the cost of capital O Yes, the project should be accepted because the NPV is positive O None of these are correct No, the project should be rejected because NPV is negative.
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Wilma is considering opening a widget factory. The unlevered cost of equity for making widgets is 0.1. This factory would cost $10 million to set up, and would produce EBIT of $3 million per year for the foreseeable future. She is thinking of applying for a $3 million subsidized perpetual loan to finance this project. Complying with the auditing requirements of this loan would have a present value of $2 million. This loan would have a rate of 0.04, while the rate she could get from the bank is 0.07. Her tax rate is 0.41. What is the NPV of this project, using the APV method?
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You are considering making a movie. The movie is expected to cost $10.1 million up front and take a year to produce. After that, it is expected to make $4.7 million in the year it is released and $1.5 million for the following four years. What is the payback period of this investment? If you require a payback period of two years, will you make the movie? Does the movie have positive NPV if the cost of capital is 10.1%? What is the payback period of this investment? The payback period is years. (Round to two decimal places.)
You are a consultant who was hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product line is $10 million. The product will generate free cash flow of $750,000 the first year, and this free cash flow is expected to grow at a rate of 3% per year. Markum has an equity cost of capital of 11.3%, a debt cost capital of 4.33%, and a tax rate of 25%. Markum maintains a debt-equity ratio of 0.50. How much debt will Markum initially take on as a result of launching this product line? a) $2.34 million b) $4.29 million c) $3.70 million d) $2.94 million e) None of the answers is correct
A manufacturer of video games develops a new game over two years. This costs $850,000 immediately and a second amount of $850,000 at the end of Year 2. When the game is released, it is expected to make $1.2 million per year for three years after that (i.e. from Year 3 to Year 5). What is the net present value of this decision if the cost of capital is 10% ? answer options below, can you show me how to do itin the TVM function on casio fx9750giii $1, 616, 299.50 $1,091, 278.72 $1, 290, 587.16 $913, 820.16 $1,389, 290.81

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