Final answer:
The payback period for the movie investment is less than 5 years, with the investment recouped sometime in year 5. The required two-year payback period is not met, hence it might be an unacceptable investment on that criterion alone. Without discounting future revenues, the positive NPV at a 10.5% cost of capital cannot be confirmed.
Explanation:
When considering making a movie with an upfront cost of $10.7 million, expected to take one year to produce, and anticipated revenues of $4.8 million in the first year and $2.1 million annually for the next four years, we want to determine the payback period for this investment.
The payback period is calculated by adding up the revenues year over year until the total equals the initial investment cost. For this movie, the payback period would be the time it takes for the movie to recoup the $10.7 million cost from its earnings. The revenues add up to $4.8 million in the first year and $2.1 million for the following four years, which totals to $13.2 million. Here's how it breaks down:
Adding these up, the movie will earn $4.8 million + $8.4 million = $13.2 million by the end of year 5, which is higher than the initial investment, resulting in a payback period of less than 5 years. Since the total by the end of year 4 is $12.6 million, the investment will be paid back sometime during the fifth year. Consequently, if the required payback period is two years, this investment would not meet that criterion.
To assess whether the movie has a positive Net Present Value (NPV) at a cost of capital of 10.5%, we would need to discount the future revenues back to present value terms and compare them to the initial investment. However, the question does not provide this calculation, so we cannot confirm the NPV status without performing the appropriate calculations.
The payback period provided by the student, 4.8 years, seems to align with these estimates assuming end-of-year cash flows and no discounting. Given that the cash inflows are sufficient to cover the initial outlay within this time, the investment may be considered, but this does not account for the time value of money.