Question
As a film producer, you are currently considering making a new film Die Hard. The film will cost $200 million to produce. In one year's
As a film producer, you are currently considering making a new film Die Hard. The film will cost $200 million to produce. In one year's time (year 1), it will generate a revenue of $1billion if it is successful, and a revenue of $150 million if it fails (assuming all revenue from the film will be realised in year 1). If the film is a success, you have the option to film a sequel Die Hard 2 which will cost $250 million in year 1.In year 2, you will have a revenue of $1.5 billion if the second film is a success and a revenue of $500 million otherwise. The first film has a 50% chance of succeeding and a 50% chance of failing. If the first film is a success, the chance of the second film being a success is 75%. Assuming the cost of capital is 10%. Should you produce the first Die Hard film? Should you produce the sequel Die Hard 2? Draw a decision tree and show all calculations.
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