Arundel Partners Guidelines

Topics: Net present value, Option, Rate of return Pages: 3 (924 words) Published: June 19, 2012
Guidelines for the Arundel Partners Case Assignment

This is a group project and only one case-report should be submitted

FIN 6425 – “Arundel Case” GuidelinesNimalendran

In this case, a movie industry analyst is asked to evaluate a proposed venture in which a group of partners would purchase the sequel rights to movies produced by the major studios. Your objective is to 1) discuss and evaluate the basic concept; 2) determine the value of the sequel rights on a per-movie basis; 3) evaluate the possible upside and potential drawbacks to the proposed plan. As you will see, the ideas here incorporate elements of capital budgeting coupled with a “real options” analysis.

Please provide answers to the following questions. You should only submit a WORD document. All the EXCEL tables should be nicely formatted and included in the WORD document.

Questions

1. Provide a brief overview of the proposed venture. Clearly describe the relevant time line. 2. Why do the proponents of this venture believe that Arundel Partners can make money buying movie sequel rights? Why do they propose buying a portfolio of rights rather than negotiating the purchase price on a film-by-film basis? Why do they propose to purchase the sequel rights at t=0 (before the first film is released) rather than at t=1? 3. Assuming a discount rate of 12% (risk free rate of 6% and a risk premium of 6%) calculate the NPV for all the sequels. Use the expected negative costs and the expected revenues given in Table 7. 4. Using the “decision-tree” approach, calculate the per-movie value of the sequel rights to the entire portfolio of 99 movies released in 1989 by the six major studios. That is assume that you will only make the sequels that have a positive NPV.

To clarify the numbers in Exhibit 7 – let’s consider the case of The ‘Burbs (Film # 8 on the list). The estimated cash flows for the hypothetical sequel are based on the data from the first film (summarized in...
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