Determine each project’s payback and NPV

The CEO of Garneau Cinemas is considering making a movie and must decide between a comedy or a thriller—it doesn’t have the production space to make both. The comedy is expected to cost $20 million up front (at t = 0). After that, it is expected to make $12 million in the first year (at t = 1) and $4 million in each of the following two years (at t = 2 and t = 3). In the fourth year (at t = 5) is it expected the movie can be sold into syndication for $2 million with no further cash flows back to Garneau Cinemas. The thriller is expected to cost $40 million up front (at t = 0). After that, it is expected to make $20 million in the first year (at t = 1) and $5 million in each of the following four years (at t = 2, 3, 4 and 5). In the sixth year (at t = 6) is it expected the movie can be sold into syndication for $25 million with no further cash flows back to Garneau Cinemas. The cost of capital is 10% and Garneau usually requires projects to have a payback within four years.

Determine each project’s payback and NPV and advise the CEO what she should do.

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