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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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BuyFindarrow_forward

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Net present value method

Metro-Goldwyn-Mayer Studios Inc. (MGM) is a major producer and distributor of theatrical andtelevision filmed entertainment. Regarding theatrical films, MGM states, Our feature filmsare exploited through a series of sequential domestic and international distribution channels, typically beginning with theatrical exhibition. Thereafter, feature films are first madeavailable for home video generally six months after theatrical release; for pay television, one year after theatrical release; and for syndication, approximately three to five years aftertheatrical release.

Assume that MGM produces a 111m during early 20Y5 at a cost of $200 million, andreleases it halfway through the year. During the last half of 20Y5, the film earns revenuesof $240 million at the box office. The film requires $80 million of advertising during therelease. One year later, by the end of 20Y6, the film is expected to earn MGM net cashflows from home video sales of $50 million. By the end of 20Y7, the 111m is expectedto earn MGM $25 million from pay TV; and by the end of 20Y8, the film is expected toearn $10 million from syndication.
Determine the net present value of the film as of the beginning of 20Y5 if the desired rateof return is 20%. To simplify present value calculations, assume all annual net cash flowsoccur at the end of each year. Use (he table of the present value of Si appearing in Exhibit 2of this chapter. Round o the nearest whole million dollars.

To determine

Concept Introduction:

NPV:

Net present value (NPV) is the method to evaluate the project feasibility. This method calculates the present value of cash inflows and outflows, and then calculates the net present value of the investment. A project should be accepted if it has a positive NPV. The formula to calculate the NPV is as follows:

  NPV = Present value of cash inflows  Present value of cash out flows

To Calculate:

The Net present value of the film

Explanation

The Net present value of the film is calculated as follows:

    Net Cash Flows PVF (20%) PV
    $ in Millions A B =A*B
    Year 0 $ (280) 1.0000 $(280)
    Year 1 $ 240 0...

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