Question 1) You are considering making a movie. The movie is expected to cost $10.5

million upfront and take a year to make. After that, it is expected to make $4.8

million in the first year it is released (end of year 2) and $2.2

million for the following four years (end of years 3 through 6) .

What is the payback period of this investment?

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

What is the NPV of the movie if the cost of capital is 10.2%?

According to the NPV rule, should you make this movie?

Question 2)

You have been offered a very long-term investment opportunity to increase your money one hundredfold. You can invest $700 today and expect to receive $70,000 in 40years. Your cost of capital for this (very risky) opportunity is 17%.

What is the IRR?

What does the IRR rule say about whether the investment should be undertaken?

What is the NPV?

What about the NPV rule? Do they agree?