Answered step by step
Verified Expert Solution
Question
1 Approved Answer
The CEO of Garneau Cinemas is considering making a movie and must decide between a comedy and a thriller-it doesn't have the production space to
The CEO of Garneau 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 $20 million up front ( at t=0). After that, it is expected to make $13 million in the first year (att=1) and $4 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 million with no further cash flows back to Garneau Cinemas. The thriller is expected to cost $35 million up front (att=0). After that, it is expected to make $15 million in the first year ( at t=1) and $3 million in each of the following four years (at t=2,3,4, and 5). In the sixth year (at t=6), it is expected that the movie can be sold into syndication for $25 million with no further cash flows back to Garneau Cinemas. The cost of capital is 10%, and Garneau 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 $ The payback for the thriller is years, and the NPV of the thriller is $ (Round to two decimal places as needed.) Advise the CEO. Choose the correct answer below. A. Since the thriller has the higher NPV, it should be selected. B. Since only one of the projects has a payback period of less than four years, it should be selected. Projects that pay the company back quicker are always preferable to projects that do not pay the company back as quickly. C. Since one project has a negative NPV, the other project should be selected even though it has a payback greater than four years. If that project's longer payback period is unacceptable, then neither project should be accepted. 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
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started