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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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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.

Under the assumption provided here, i the film expected to be financially successful?

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 Indicate:

If the film will be financially successful or not

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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