Arundel Bros Case

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John Doe Arundel Partners: The Sequel Project 1. Arundel Partners believe that buying movie sequel rights will have a positive NPV because they will make more money producing the sequels than it will cost them to purchase the rights to the sequels. Buying on a film-to-film basis would require a significant more time negotiating the deals for each film and would potentially cost more per film than buying several rights at once. In addition, on a film-by-film basis, the movie studios may demand a higher price based on the estimated performance of the film. 2. Using a traditional DCF method we calculated that the per-film value of a sequel right to be a loss of $2.43 Million. To obtain this value we discounted the costs back three years to get our present value, and discounted inflows back four years. After calculating these two present values, we subtracted the costs from the inflows to reach our value. We could adjust the DCF to get a value closer to the true value of sequel rights by adjusting the WACC based on the success of the first film. You would require a higher WACC if the first film did not perform well. This calculation essentially creates a probability of a film being made, and will help create a more accurate DCF value. 3. Using the real options model, we estimated a per-film value of a sequel right to be $5.87 Million. We first built a binomial tree based on asset values, starting with $13.71 Million, our value from the DCF calculation. We assumed a time period of one year with an interval of 1/12 (1 month). After completion of the binomial tree for asset values we created a tree to give us the per-film value of a sequel using real options. To obtain the starting values on the right side of our real option tree, we subtracted the present value of costs from the corresponding cell in the binomial tree for asset values. We then
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