Reference no: EM131829509

PROBLEM - Net Present Value and Taxes

Associated Penguin Productions is evaluating a film project. The president of Associated Penguin estimates that the film will cost$20,000,000 to produce. In its first year, the film is expected to generate $ 16,500,000 in net revenue, after which the film will be released to video. Video is expected to generate $8,000,000 in net revenue in its first year, $2,500,000 in its second year, and $ 1 ,000,000 in its third year. For tax purposes, amortization of the cost of the film will be $ 15,000,000 in year 1 and $5,000,000 in year 2.The company's tax rate is 40 percent, and the company requires a 12 percent rate of return on its films.

Required - What is the net present value of the film project? To simplify, assume that all outlays to produce the film occur at time 0. Should the company produce the film?