(3) You are considering making a movie. The movie is expected to cost $10 million upfront today (year 0) and take two full years to cast, film, produce, and prepare for distribution. It is expected to make $5 million when it is released in theatres two years from today and $2 million per year for the following four years after that (years 3-6).

(a) What is the payback period of this investment?

(b) If you require a payback period of two years, will you make the movie?

(c) Does the movie have a positive NPV if the cost of capital is 10%?

(d) Does the movie have a positive NPV if the cost of capital is 7%?

(e) After performing some additional analysis, you determine that you will be able to complete and release the movie in theatres in one year rather than two years, while still earning the same subsequent cash flows (i.e., the movie will earn $5 million in year 1 and $2 million in years 2- 5). You still require a payback period of two years and the cost of capital is still 10%. Will you decide to make the movie based on your payback period rule? Will you decide to make the movie based on your NPV calculation?