Reference no: EM132961123

Question - You have been hired by KLA Capital (An elite hedge fund based in Kent, UK) to provide advice to one of their portfolio companies in the Movie Business. The movie Company is trying to decide whether it should invest in a streaming service that will compete with Netflix and other streaming companies. You have been provided with the following information:

-The company will have to spend $3 billion in acquiring a proprietary streaming product. This investment will be depreciated straight-line over 5 years to a salvage value of zero.

-In addition, the company will also need to invest an additional 5% of the initial acquisition cost in working capital. Eighty percent of the working capital investment is expected to be recovered at the end of the project.

-You expect to have 30 million subscribers, paying $150 per year, for the next 5 years.

-The operating expenses (not including depreciation) of servicing the subscribers is expected to be 40% of revenues.

-To provide exclusive content on this new streaming service, the company will have to pull movies that it now shows on Netflix, Amazon Prime and other streaming services and forfeit $300 million in annual pretax licensing fees that it would have received every year for the next 5 years.

-The cost of capital is 10% and the marginal tax rate is 20%.

-Assume that the Streaming service will wound up after 5 years.

Required -

Estimate the annual cash flows to the Movie company from this project. show your cash flows for each year of the project, including the initial period and the terminal period.

Should the Movie Company embark on this new project? Be specific in your recommendation and justify your answer.