Regarding theatrical films, MGM states Our feature films are exploited through a
ID: 2380647 • Letter: R
Question
Regarding theatrical films, MGM states Our feature films are exploited through a series of sequential domestic and international distribution channels, typically beginning with a theatrical exhibition. Thereafter feature films are first made available for home video generally six months after theatrical release; for pay television, one year after theatrical release; and for syndication, approximately three to five years after theatrical release.
Assume that MGM produces a film during early 2012 at a cost of $300 million ($300,000,000), and releases it halfway through the year. During the last half of 2012, the film earns revenues of $350 million ($350,000,000) at the box office. The film requires $75 million ($75,000,000) of advertising during the release. One year later, by the end of 2013, the film is expected to earn MGM net cash flows from home video sales of $45 million ($45,000,000). By the end of 2014, the film is expected to earn MGM $30 million ($30,000,000) from pay TV; and by the end of 2015 the film is expected to earn $10 million ($10,000,000) from syndication.
Required:
1. Determine the net present value of the film as of the beginning of 2012 if the desired rate of return is 20%. To simplify the present value calculations, assume all annual net cash flows occur at the end of each year. Present your answer as an EXCEL spreadsheet.
Calculate the total cash flows from the release of the movie for the year 2012. These will include:
Explanation / Answer
1. CALCULATION OF NPV
YEAR CASHFLOW PV@20%
2012 (300-350+75) (20.83)
2013 45 31.2
2014 30 17.4
2015 10 4.82
SO NPV=31.2+17.4+4.82-20.83=$32.59 MILLION
TOTAL CASH FLOW FOR 2012
GROSS TICKET SALES=350
PRODUCTION COST=300
MARKETING COST=75
TOTAL=$(25) MILLION
2.TOTAL CASH FLOW FROM HOME VIDEO SALES FOR 2013=$45 MILLION
3.TOTAL REVENUE FROM PAY TV RELEASES FOR 2014=$30 MILLION
4.TOTALREVENUE FROM SYNDICATION RELEASES FOR 2015=$10 MILLION
AS THE NPV IS PPOSITIVE THE STUDIO IS RECCOMENDED TO MAKE THE FILM