Reference no: EM132506721

Point 1: Invest $100,000 into the production of a film. You receive $20,000 in royalties for two years, net of tax. In year three you sell the international distribution rights (i.e. you have a cash inflow) for $55,000, net of tax, and receive full royalties that year of $20,000. After that, your royalties drop down to $15,000 for five years. At the end of those five years (i.e. during year 9) you produce a sequel that costs $200,000. It goes terribly and not only does the sequel make zero money, but your fans label you a sellout and stop renting your movie, so your royalties end immediately (i.e. nothing received in the year of the sequel). While sitting at a bar, you wonder if this was ever a good idea financially. Presenting a net present value analysis of the above and use a cost of capital of 15%.

Question 1: What is the NPV? Besides the initial cost of $100,000, assume all cash flows and sequel cost occur at the end of their respective year.