Pinecrest Film Studios is thinking about going into talks with acclaimed author J.B. Dowling for the exclusive rights to make her upcoming, yet-to-be-released novel about a young orphan boy who finds out that he is destined to be a warlock, into a movie. Ms. Dowling is demanding $1 million from the studio for the rights to her book. Analysts at the studio estimate that if the book is a commercial success, then a movie based on the book will be as well to the tune of $3.5 million a year from now; if it is not, then making the movie would cost the studio $5 million in production costs after revenue from ticket sales are taken into account over the same time frame. Assume that it takes the studio one year to make and release the movie after buying the rights to the book, and assume the book has a 50/50 chance of being a commercial success. Also, assume a risk-free rate of 8%.

a. Would it be a wise decision for the studio to buy the rights to the book at this point before it knows whether the book will be a success? Why or why not?

b. Assuming the book turns out to be a commercial failure and the studio decides not to make the

c. Assume instead that the revenue from a successful film is only $1 million, so clearly only making one will not make buying the rights to the book today worthwhile. However, assume that up to three successful sequels can be made of this franchise. How many consecutive successful films in the franchise would be needed (including the original) to justify the cost of buying the rights to the book today? (Assume it takes one year from the release of the previous movie to produce and release the next sequel). SHOW YOUR WORK.