Arundel Partners Case

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Arundel Partners: The Sequel Project
The maximum per-film price for the sequel rights that Arundel Partners should pay is $5.12M.

If Arundel Partners were to use the traditional DCF methods to find the value of the sequel rights, the NPV would be -$8.42M loss per-film (see Appendix 1).

Calculation Details
We assume that Arundel Partners will purchase a portfolio of films similar to one used in the analysis. The average hypothetical net inflow of the sequel ($21.57M) is used to figure out the value of the state variable for the real options model. The state variable is the average hypothetical net inflow of the sequel, discounted using a WACC of 12.36% back to 1989. Discounting back to 1989 is important because this is the time of the
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This approach allows for valuing real assets with some degree of operating flexibility, incorporating the value of the flexibility into the option price. It values the option to exercise but not the obligation to make future investments. It is based on the law of one price (the price of two portfolios with the same cash flows in every state of the world must be the same). Option value increases with great uncertainty (see Exhibit 3). The major uncertainties are Arundel Partners’ WACC and volatility of return on assets. A sensitive analysis shows the degree of changes with the changing uncertainties. The major disadvantage of this approach is that it often requires changes in business process. In Arundel Partners’ case, the terms and provisions in the contract will mitigate some of the disadvantages.

Additional terms and provisions for the sequel rights portfolio
The terms and provisions for the sequel rights for one or more studios’ entire production:
The maturity or expiration rate of exercising the sequel rights is 1 year. This will allow Arundel enough time to make a decision about making a sequel and enable it to more quickly write off its investment in rights it chose not to exercise.
Arundel Partners can chose to produce the sequel or hire another firm to do so.
Arundel Partners will grant right of first refusal to the studio on any rights it planned to sell. If the studio is not interested, Arundel Partners can sell the rights to the highest

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