Arundel Partners is a financial company that is contemplating an unusual investment project. The company is looking to buy rights to possible sequels for prospective movies and profit by actually making the sequels for movies that become commercial success. The company has already initiated talks with some studios and projects that it can buy a portfolio of movie rights for $2 million per movie. The valuation of the project is tricky because of the uncertain nature of revenues in the movie industry. In order to value the project, we propose the use of net present value approach with an explicit adjustment for the option embedded in the proposal. It is estimated that the company might find it profitable to purchase movie rights from certain studios, but the uncertain nature of the calculation warrant further scrutiny with additional data.
Discount Rate, Average PV of Inflows at Year 4, Average PV of Outflows at Year 3, Total No of Movies, Average NPV at Year 0, Maximum Payment per Sequel Rights
Why do the principals of Arundel Partners think they can make money buying movie sequel rights? Why do the partners want to buy a portfolio of rights in advance rather than negotiating film-by-film to buy them?
Estimate the per-film value of a portfolio of sequel rights such as Arundel proposes to buy. [There are several ways to approach this problem, all of which require some part of the dataset in Exhibit 6-9. You may find it helpful to consult the Appendix, which explains how these figures were prepared.]
What are the primary advantages and disadvantages of the approach you took to valuing rights? What further assistance or data would you require to refine your estimate of the rights’ value?
What problems or disagreements would you expect Arundel and a major studio to encounter in the course of a relationship like that described in the case? What contractual terms and provisions should Arundel insist on?