Gus Van Sant vs. Johnny Depp - publié le 19/02/2009

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Gus Van Sant vs. Johnny Depp - publié le 19/02/2009

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You have wisely decided to use NPV to conduct your research. Discuss all the costs that should be included as your initial cash outflow for each scenario. Explain why each should and should not be included in your analysis. As the New CFO of the company, I am in charge of choosing the best solution in order to make this movie, the most profitable possible. First I am going to use the Net Present Value for each scenario and then explain how I proceeded and why. We will then enlarge the scope of the question to see how financial aspects are as important in the movie industry for companies in order to anticipate risks and be profitable. Thanks to the NPV, we will determinate the most profitable scenario out of the two pre-selected.

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You have wisely decided to use NPV to make your determination. Discuss
Calculate the NPV for each scenario and explain the process
What is another important scenario that should be considered and what is it worth today?
You are considering including part of the costs of the studio's finance department as a cost of these films. This includes the costs of both the employees and the overhead they use (rent, electricity, phone, etc.). Should occasions when they should be included and others when they should not? Explain
The head of Marketing for the studio believes that keeping Depp is the best choice since Payback is much shorter. The Van Sant film, meanwhile is expected to have a longer life because of its potential cult following. Explain in general why this Payback method is not the best to use
The studio that you work for is only one part of a much larger corporation. The larger corporation also has theme parks, a music division, and a publishing unit. Describe how this might affect your financial evaluation of the projects
Revenues from the US movie business have become less predictable in recent years. Rising anti-Americanism and declining cinema and DVD sales, combined with rising production budgets and actors' salaries, have made industry profits less than ever. If you believe that the industry is riskier, where should that be reflected mathematically in your NPV calculations. Explain why
The head of the studio in our case reports to the CEO of the corporation. The boss of the CEO are the shareholders. Describe why this is the case and explain how they supervise him. Describe also the incentives he has for acting in their interests, and not just his own

Extraits

[...] SCENARIO Keep Depp as the lead actor: Included costs: Movie rights: The development department bought this movie rights three years ago for $ and currently, they are estimated to be worth $ I decided to include this expense in the initial cash flow because the firm lost the opportunity to sell it at the good time in order to make appreciation on this value. This is why it is an opportunity cost. Salary of Mickael Bay, the new action director 000) Salary of Johnny Depp 000). Salary of Juliette Binoche 000). Cost of movie production 000). [...]

[...] Those amounts will be listed as C0, C1, C C10. REVENUES Case Low Net Revenues next year from worldwide cinema release: $30,000,000 Cash profits from worldwide DVD release in two years: 15,000,000 Continuing yearly profits (Years 3 10) from DVD release: 200,000 Annual profits from sales to worldwide television (Years 3 100,000 Combined post year 10 profits from all sources in perpetuity: 0 C0 is the initial cash outflow C1 represents the amount of money generated by movie's revenues within the first year: $ C2 represents the amount of money generated by movie's revenues within the second year: $ For years 3 to 10, it is the same amount: $ + $ Also, we will use the Net Present Value formula: NPV(C)= Income / + Cost of Capital)^(C) We will proceed with the same method for the other case and the other scenario. [...]

[...] We are therefore assured of not facing bigger damages. However we will not register any income from this movie (except the sale of the movie rights). We will also lose the money already invested: $ for Depp's salary and $ for movie production. We have to underline the fact that those costs does not appear in the calculation of the net present value for this scenario because they represent sunk costs. Calculating the Net present value for this scenario, we obtain a total of $ which represents the sale of the movie rights. [...]

[...] It could be an optimal plan. Scenario Low Case COC NPV C0 - -368 C 130/ C 130/ C C C C C C C C NPV - 368 NPV = - + 000/1,1 + 000/(1,1)^2 + 000/(1,1)^2 + 000/(1,1)^3 + 000/(1,1)^4 + 000/(1,1)^5 + 000/(1,1)^6 + 000/(1,1)^7 + 000/(1,1)^8 + 000/(1,1)^9 + 000/(1,1)^10 = - + = - $ With a 10 year span, and a cost of capital of the cash flows of the low case for the second scenario are worth $ today. [...]

[...] Gus Van Sant vs. Johnny Depp GUS VAN SANT VS. JHONNY DEPP 1. You have wisely decided to use NPV to make your determination. Discuss all the costs that should be included as your initial cash outflow for each scenario. Explain why each should and should not be included in your analysis. As the New CFO of the company, I am in charge of choosing the best solution in order to make this movie, the most profitable possible. First I am going to use the Net Present Value for each scenario. [...]

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