Imagine That You Are the Producer of Harry Potter Films

Multiple Choice

Imagine that you are the producer of Harry Potter films. You are trying to decide whether to film the next two Harry Potter movies at the same time. If you film them both at once, you can save money on production costs, but you could lose a lot of money if the first one flops and no one goes to see the second one. Specifically, if you film them both at once, it will cost a total of $300 million, but if you film them separately, they will cost $200 million each. If the first one is successful, it will have revenues of $1 billion and the second one will have revenues of $1.5 billion. If the first one fails, it will only have revenues of $150 million and the second one will have revenues of only $50 million. If you decide to film them separately and the first one flops, you don't have to film the second one. The first film has a 50 percent chance of succeeding and a 50 percent chance of failing. Assume that all figures are given as present values (you do not need to do any additional discounting) . Should you film both of them now or film them separately? Why?

A) Film them together now as NPV = $1,050 million.
B) Film them separately as NPV = $1,125 million.
C) Film them separately as NPV = $1,025 million.
D) None of the options are correct.