# 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.

### Survey of Accounting (Accounting I)

8th Edition
Carl Warren
Publisher: Cengage Learning
ISBN: 9781305961883

### Survey of Accounting (Accounting I)

8th Edition
Carl Warren
Publisher: Cengage Learning
ISBN: 9781305961883

#### Solutions

Chapter
Section
Chapter 15, Problem 15.5.1C
Textbook Problem

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