Reference no: EM133059734
In December 2015, The Walt Disney Studios celebrated the world premiere of Star Wars: The Force Awakens. Based on its success, Disney analyzed whether it should invest in making more big budget movies each year from its Pixar, Marvel Studios, and Lucas film labels. It refers to this strategy as making 'tent pole' movies, which are movies that can carry its brand and characters through Disney's other business units such as Disney Parks, Experiences and Consumer Products, the Disney Music Group, etc., sort of like a tent pole holding up an entire tent (for example, concurrent with the Black Panther movie they released a Black Panther album, along with Black Panther toys and even Black Panther meet and greets in their Parks).
Disney requires a four year payback.
Based on its cost of capital (topic to be discussed in the last learning module) and the amount of risk this type of venture has, Disney determines that its required rate of return (appropriate discount rate) is 15%.
Disney projects out the following cash flows for its tent pole strategy:
|
Period
|
Cash Flow
|
|
Year 0
|
($10,026,455) initial investment
|
|
Year 1
|
$3,445,205
|
|
Year 2
|
$7,425,710
|
|
Year 3
|
$11,398,808
|
|
Year 4
|
$14,629,124
|
Answer the following three questions using Excel. For questions 2 and 3, make sure to use the Excel NPV and IRR functions.
- What is the payback period of the tent pole strategy? Based on this criteria, should Disney invest? Why?
- What is the NPV of the tent pole strategy? Based on this criteria, should Disney invest? Why?
- What is the IRR of the tent pole strategy? Based on this criteria, should Disney invest? Why?