The CEO of Garneau Cinemas is considering making a movie and must decide between a comedy and a thriller-it doesn't have the production space to make both. The comedy is expected to cost $20 million up front (at t = 0). After that, it is expected to make $11 million in 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 syndication for $2 million with no further cash flows back to Garneau Cinemas. The thriller is expected to cost $45 million up front (at t = 0). After that, it is expected to make $25 million in the first 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 is 10%, 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.
The CEO of Garneau Cinemas is considering making a movie and must decide between a comedy and a thriller-it doesn't have the production space to make both. The comedy is expected to cost $20 million up front (at t = 0). After that, it is expected to make $11 million in 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 syndication for $2 million with no further cash flows back to Garneau Cinemas. The thriller is expected to cost $45 million up front (at t = 0). After that, it is expected to make $25 million in the first 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 is 10%, 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.
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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Transcribed Image Text:The CEO of Garneau Cinemas is considering making a movie and must decide between a
comedy and a thriller-it doesn't have the production space to make both. The comedy is
expected to cost $20 million up front (at t = 0). After that, it is expected to make $11 million
in 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 syndication
for $2 million with no further cash flows back to Garneau Cinemas. The thriller is expected
to cost $45 million up front (at t = 0). After that, it is expected to make $25 million in the
first 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 is
10%, 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 is
The payback for the thriller is
(Round to two decimal places as needed.)
million.
million.
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