   Chapter 15, Problem 7CDQ

Chapter
Section
Textbook Problem

Why might the use of the cash payback period foranalyzing the financial performance of theatricalreleases from a motion picture production studiobe used over the net present value method?

To determine

Concept Introduction:

Payback Period:

Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project.

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:

Why the production house would like to use the cash payback period over the net present value method

Explanation

Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project.

The production house would want to evaluate the p...

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