Associated Penguin Productions is evaluating a film project The president of Associated penguin estimates that the film will cost 20000000 to produce?

Answer 1

Associated Penguin Productions is evaluating a film project: The president of Associated penguin estimates that the film will cost $20,000,000 to produce. In the first year, the film is expected to generate $16,500,000 in net revenue, after which the film will be released to video, Video is expected to generate $8,000,00 in net revenue in its first year, $2,500,000 in its second year and $1,000,00 in its third year. For tax purposes amortization of the cost of the film will be $15,000,00 in year 1 and $5,000,000 in year 2. The company�s tax rate is 40 percent and the company requires a 12 percent rate of return on its films.

Required:

What is the net present value of the film project? To simplify, assume that all outlays to produce the film occur at time 0. Should the company produce the film?

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