Project evaluation tools: (20 marks) You are considering making a movie. The movie is expected to cost $50 million up front (i.e. you pay the $50 million today) and take a year to make. At the beginning of year 2, when the movie is released, it is expected to earn $15 million (assume the full $15 million is earned at the beginning of year 2). After that, each year the earnings are expected to be 10% lower than the previous year's earnings, continuing in perpetuity. a) [5 marks] If your required return on this project is 15%, should you make the movie based on its NPV? b) [4 marks] What is the IRR of this project? Based on the IRR, should you make the movie? c) [6 marks] Draw an NPV profile for this project. Show the following on your graph: 1. Label the axes 2. Indicate the IRR and NPV from part (a) and (b) 3. Show the NPV when the discount rate is zero 4. Indicate the discount rates at which you would accept the project. d) [2 marks] If your required return on the project is greater than the IRR, would you accept the project? Explain briefly. e) [3 marks] You decide to rework your calculations assuming that in ten years' time you will spend additional money to launch the movie into various Spanish-speaking countries across the world. This will help to boost sales from year 11 onwards. Would IRR be an appropriate Investment Decision Rule tool to use to evaluate the project now? Are there any tools that would be useful in your decision making? Explain briefly. Project evaluation tools: (20 marks) You are considering making a movie. The movie is expected to cost $50 million up front (i.e. you pay the $50 million today) and take a year to make. At the beginning of year 2, when the movie is released, it is expected to earn $15 million (assume the full $15 million is earned at the beginning of year 2). After that, each year the earnings are expected to be 10% lower than the previous year's earnings, continuing in perpetuity. a) [5 marks] If your required return on this project is 15%, should you make the movie based on its NPV? b) [4 marks] What is the IRR of this project? Based on the IRR, should you make the movie? c) [6 marks] Draw an NPV profile for this project. Show the following on your graph: 1. Label the axes 2. Indicate the IRR and NPV from part (a) and (b) 3. Show the NPV when the discount rate is zero 4. Indicate the discount rates at which you would accept the project. d) [2 marks] If your required return on the project is greater than the IRR, would you accept the project? Explain briefly. e) [3 marks] You decide to rework your calculations assuming that in ten years' time you will spend additional money to launch the movie into various Spanish-speaking countries across the world. This will help to boost sales from year 11 onwards. Would IRR be an appropriate Investment Decision Rule tool to use to evaluate the project now? Are there any tools that would be useful in your decision making? Explain briefly
