Determine the net present value of the film as of the beginning of 2018 if the desired rate of return is 20%. To simplify present value computations, assume that all annual net cash flows occur at the end of each year. Use the table of the present value of $1 appearing in Exhibit 2 of this chapter. Round to the nearest whole million dollars. Under the assumptions provided here, is the film expected to be financially successful? Explain.
Net Present Value Method for a Service Company
Metro-Goldwyn-Mayer Studios Inc. (MGM) is a major producer and distributor of theatrical and television filmed entertainment. Regarding theatrical films, MGM states, “Our feature films are exploited through a series of sequential domestic and international distribution channels, typically beginning with theatrical exhibition. Thereafter, feature films are first made available for home video (online downloads) generally 6 months after theatrical release; for pay television, one year after theatrical release; and for syndication, approximately 3 to 5 years after theatrical release.”
Assume that MGM produces a film during early 2018 at a cost of $340 million and releases it halfway through the year. During the last half of 2018, the film earns revenues of $420 million at the box office. The film requires $90 million of advertising during the release. One year later, by the end of 2019, the film is expected to earn MGM net
-
Determine the net present value of the film as of the beginning of 2018 if the desired
rate of return is 20%. To simplify present value computations, assume that all annual net cash flows occur at the end of each year. Use the table of the present value of $1 appearing in Exhibit 2 of this chapter. Round to the nearest whole million dollars. -
Under the assumptions provided here, is the film expected to be financially successful? Explain.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
