Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The CEO of Gameau Cinemas is considering making a movie and must decide between a comedy and a thriller-it doesn't have the production space to

image text in transcribed
The CEO of Gameau Cinemas is considering making a movie and must decide between a comedy and a thriller-it doesn't have the production space to make both. The comedy is expected to cost $25 million up front (at t=0 ). After that, it is expected to make $17 million in the first year (at t=1 ) and $3 million in each of the following two years (at t=2 and t=3 ). In the fourth year (at t=5 ), it is expected that the movie can be sold into syndication for $2 miltion with no further cash flows back to Garneau Cinemas. The thriller is expected to cost $45 million up front ( at t=0 ). After that, it is expected to make $25 million in the first year (at t=1 ) and $4 million in each of the following four years (att=2,3,4, and 5). In the sixth year ( at t=6), it is expected that the movie can be sold into syndication for $30 million with no further cash flows back to Gameau Cinemas. The cost of capital is 11%, and Gameau usually requires projects to have a payback within four years. Determine each project's payback and NPV, and advise the CEO what she should do. The payback for the comedy is years, and the NPV of the comedy is 5 The payback for the thriller is years, and the NPV of the thriller is $ (Round to fwo decimal places as needed.) Advise the CEO, Choose the correct answer below. Check pic A. Since the thriller has the higher NPV, it should be selected. B. Since one project has a negative NPV, the other project should be selected even though it has a payback greater than four years. C. Since only one of the projects has a payback period of less than four years, it should be selected. Projects that pay the company t D. Since the comedy has the higher NPV, it should be selected

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access with AI-Powered Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Students also viewed these Accounting questions