Regarding theatrical films, MGM states â 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:
· Gross ticket sales
· Production cost
· Marketing cost
2. Next, calculate the total cash flows from the 2013 home video sales
3. Calculate the 2014 revenues from pay TV release; and finally
4. Calculate the revenues from 2015 syndication release.
Next, apply the net present value factors found in the NPV of $1 table in the back of the book for the periods covered at 20%. 2012 will be year 1, 2013 year 2, 2014 year 3, and 2015 year 4 to find the appropriate factor.Lastly, determine the overall net present value of the movie release by subtracting the expenses incurred in making the movie from the net present value of the revenues. Then give a recommendation to the studio on whether to produce the movie or not. Be sure your recommendation is professionally worded, and give a reason for your recommendation.