Suppose that Arundel purchases the sequel rights to all 99 movies from Exhibit 7 and exercises every option to produce a sequel. Exhibit 7 provides the average cost (at t=3) and average cash inflow (at t=4) for a sequel. What is the NPV at t=0 of producing a sequel, on average? Discuss. Assume a discount rate of 12 percent.

  

Exhibit 7 Studio/Movie Title Estimated Expected Present Values and One-Year Holding Period Returns Based on Data in Exhibit 6 (in millions of dollars) MCA UNIVERSAL 1 PARENTHOOD 2 BORN ON THE FOURTH OF JULY 3 FIELD OF DREAMS 4 UNCLE BUCK 5 SEA OF LOVE 6 ALWAYS 7 K-9 8 THE 'BURBS 9 THE DREAM TEAM 10 DO THE RIGHT THING 11 DAD 12 SHOCKER 13 THE WIZARD 14 RENEGADES PARAMOUNT PICTURES 15 HARLEM NIGHTS 16 PET SEMATARY 17 BLACK RAIN 18 MAJOR LEAGUE 19 COUSINS 20 WE'RE NO ANGELS 21 LET IT RIDE 22 SHIRLEY VALENTINE 23 FAT MAN AND LITTLE BOY 24 THE EXPERTS SONY PICTURES ENTERTAINMENT 25 LOOK WHO'S TALKING (TS) 26 WHEN HARRY MET SALLY (C) 27 STEEL MAGNOLIAS (TS) 28 SEE NO EVIL; HEAR NO EVIL (TS) 29 THE BEAR (TS) 30 GLORY (TS) 31 LOOK UP (TS) 32 CASUALTIES OF WAR (C) 33 CHANCES ARE (TS) 34 FAMILY BUSINESS (TS) 35 SHE'S OUT OF CONTROL (C) 36 WHO'S HARRY CRUMB? (TS) 37 ADVENTURES OF BARON MUNCHAUSEN (C) 38 TRUE BELIEVER (C) 39 TROOP BEVERLY HILLS (C) 40 TAP (TS) 41 DEEPSTAR SIX (TS) 42 JOHNNY HANDSOME (TS) 43 MUSIC BOX (TS) 44 IMMEDIATE FAMILY (C) 45 LISTEN TO ME (C) 46 PHYSICAL EVIDENCE (C) 47 OLD GRINGO (C) 48 LOVERBOY (TS) 49 SING (TS) 50 WINTER PEOPLE (C) 51 WELCOME HOME (C) 52 ADVENTURES OF MILO AND OTIS (C) 53 THE BIG PICTURE (C) 54 SLAVES OF NEW YORK (TS) 55 EAT A BOWL OF TEA (C) 56 TO KILL A PRIEST (C) PV of Net Inflows at Year 1a $100.1 74.5 59.1 60.0 53.5 34.3 37.8 32.2 28.4 30.0 17.7 14.3 12.7 6.9 $55.4 52.6 44.1 40.3 21.2 2.1 3.6 8.9 3.3 8.2 $142.3 83.3 80.4 40.5 22.4 29.3 14.1 11.4 10.8 8.3. 10.5 7.6 11.6 5.8 6.9 6.7 7.1 6.0 7.1 2.2 1.6 3.6 6.0 2.0 2.2 4.4 5.1 3.1 8.4 7.8 8.4 8.2 First Film PV of Negative Cost at Year 0 $21.5 19.4 17.2 16.1 26.9 33.3 12.9 18.3 16.1 7.5 20.4 6.5 8.6 12.9 $32.3 11.8 32.3 12.9 14.0 23.7 19.4 8.6 20.4 12.9 $10.8 20.4 23.7 19.4 22.6 22.6 18.3 26.9 19.4 19.4 16.1 15.1 55.9 15.1 19.4 16.1 8.6 21.5 19.4 15.1 16.1 18.3 36.6 10.8 15.1 17.2 15.1 8.6 8.6 6.5 2.2 10.8 One-Year Return 3.65 2.85 2.44 2.72 0.99 0.03 1.93 0.76 0.76 2.98 (0.13) 1.22 0.48 (0.46) 0.72 3.45 0.37 2.12 0.52 (0.91) (0.82) 0.04 (0.84) (0.36) 12.24 3.08 2.40 1.09 (0.01) 0.30 (0.23) (0.57) (0.44) (0.57) (0.35) (0.49) (0.79) (0.61) (0.64) (0.58) (0.17) (0.72) (0.63) (0.85) (0.90) (0.80) (0.84) (0.81) (0.85) (0.74) (0.66) (0.64) (0.02) 0.20 2.92 (0.24) PV of Net Inflows at Year ga $76.8 56.8 47.3 47.0 44.4 31.4 29.3 27.3 22.9 21.2 17.4 12.4 8.7 7.4 $51.1 41.1 39.0 33.7 16.2 8.7 4.3 4.3 3.2 1.1 $105.5 64.6 61.7 32.0 21.5 20.8 13.2 12.3 10.9 10.2 9.0 7.9 7.0 6.7 6.5 6.4 5.8 5.0 4.9 4.3 3.8 3.4 3.2 3.2 2.4 2.1 1.7 1.2 1.2 1.2 1.2 1.1 Hypothetical Sequel PV of Negative Cost at Year 3 $28.2 25.4 22.6 21.2 35.3 43.7 16.9 24.0 21.2 9.9 26.8 8.5 11.3 16.9 $42.3 15.5 42.3 16.9 18.3 31.0 25.4 11.3 26.8 16.9 $14.1 26.8 31.0 25.4 29.6 29.6 24.0 35.3 25.4 25.4 21.2 19.7 73.4 19.7 25.4 21.2 11.3 28.2 25.4 19.7 21.2 24.0 48.0 14.1 19.7 22.6 19.7 11.3 11.3 8.5 2.8 14.1 One-Year Return 1.72 1.24 1.10 1.22 0.26 (0.28) 0.73 0.14 0.08 1.15 (0.35) 0.47 (0.23) (0.56) 0.21 1.65 (0.08) 0.99 (0.11) (0.72) (0.83) (0.62) (0.88) (0.94) 6.48 1.41 0.99 0.26 (0.27) (0.30) (0.45) (0.65) (0.57) (0.60) (0.58) (0.60) (0.90) (0.66) (0.74) (0.70) (0.49) (0.82) (0.81) (0.78) (0.82) (0.86) (0.93) (0.77) (0.88) (0.91) (0.91) (0.89) (0.89) (0.85) (0.56) (0.92)