Metro-Goldwyn-Mayer Studios Inc. (MGM) is a major producer and distributor of theatrical and television filmed entertainment. Regarding theatrical films, MGM states, ?oOur feature films are exploited through a series of sequential domestic and international distribution channels, typically beginning with 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 2011 at a cost of $195 million, and releases it halfway through the year. During the last half of 2011, the film earns revenues of $235 million at the box office. The film requires $50 million of advertising during the release. One year later, by the end of 2012, the film is expected to earn MGM net cash flows from home video sales of $36 million. By the end of 2013, the film is expected to earn MGM $43 million from pay TV; and by the end of 2014, the film is expected to earn $12 million from syndication.
(a) Determine the net present value of the film as of the beginning of 2011 if the desired rate of return is 20%. To simplify present value calculations, assume all annual net cash flows occur at the end of each year. Use the table of the present value of $1 appearing in Exhibit 1 of this chapter. Round to the nearest whole million dollars.
(b) Under the assumptions provided here, is the film expected to be financially successful?