Illustrate what is the net present value of the film project

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Reference no: EM13123329

Associated Penguin Productions is evaluating a film project: The president of Associated penguin estimates that the film will cost $20,000,000 to produce. In the first year, the film is expected to generate $16,500,000 in net revenue, after which the film will be released to video, Video is expected to generate $8,000,00 in net revenue in its first year, $2,500,000 in its second year and $1,000,00 in its third year. For tax purposes amortization of the cost of the film will be $15,000,00 in year 1 and $5,000,000 in year 2. The companys tax rate is 40 percent and the company requires a 12 percent rate of return on its films.

Required:

What is the net present value of the film project? To simplify, assume that all outlays to produce the film occur at time 0. Should the company produce the film?

Reference no: EM13123329

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