Consider a scenario where you have $10 million to invest and are considering inv
ID: 2650283 • Letter: C
Question
Consider a scenario where you have $10 million to invest and are considering investing in Netflix or Blockbuster equity (or both). In the context of this investment scenario address the following questions:
1.Develop estimates of the fair market values of Netflix and Blockbuster.
2.What are the net present and present values of an investment in each?
3.Based on the payback method, which is the better investment, Netflix or Blockbuster?
Net Present Value
Calculating NPV using expected return of 25%.
With a lower expected return of 10%, Netflix
Blockbuster $000 omitted year ended 2001 2002 2003 2004 2005 2006 -219,600 337,100 -845,200 -1,241,600 -388,000 79,100 -379,700 avg yearly operating income -1,518,800 future value Netflix year ended 2001 2002 2003 2004 2005 2006 -36,782 -10,785 2,855 19,354 2,989 64,414 7,008 avg yearly operating income 28,030 future valueExplanation / Answer
Assuming that Weighted Average Cost of capital be 15%
Fair Value is the sum of present value of cash flows & terminal value.
NPV is basically the difference between the sum of present value of all cash inflows which a project generates over the years and the initial investment (cash outflow) of a particular project
NPV of Blockbuster @ 15% = 293130.4-(639093) +(-816372.2)+ (-221840.26) + (-39326.68) + (- 219,600)
= $ - 1564448
NPV of Netflix @ 15% = -9378.26 + 2158.79 + 12725.57 + 1708.97 + 32025.14 - 36,782
= $ 2458.21
Based on NPV & Fair value, Netflix should be chosen for Investment purpose.
Paback period is basically the period within which the intital investment is recovered.
On the basis of payback period, blockbuster should be preferred as it recovers the investment in the first year itself as compared to Netflix which recovers its investment in the fifth year.
BlockBuster Years 2001 2002 2003 2004 2005 2006 Present Value of Cash Flows -219,600 293130.4 -639093 -816372.2 -221840.26 39326.68 Terminal Value -188778 Fair Value( -1,753,226