Mini Pseudo Case

EECO 5103                                                                                                                            Williams

Mini Pseudo Case, Spring 2021

Premise: You are a big shot at a movie studio who gets to decide the fate of the movie Titanic 2 that is currently in production but whose production has suffered cost overruns.  Today is March 27, 2021

(All dollar amounts below are discounted to their present values, after taxes)

The story

In January 2019 you gave director James Cameron a budget of $500 million to produce Titanic 2: Rose and Frozen Jack.  But he has already spent the entire $500 million, and he tells you on March 27, 2021 that he needs an additional $400 million to complete to movie so that it may be released to viewers. Thus: if you give him the additional $400 million he will deliver the finished movie for $900 million–$400 million over budget.  (These production costs do not include distribution and marketing costs; see below.)

            Your research team (which is very, very good at forecasting) forecasts the following, if the film is completed and released to viewers:

1) Worldwide revenue from all sources (theatres, Blu-ray, cable, streaming, etc.): $950 million

2) Total worldwide distribution and marketing costs: $300 million (This $300 million is an additional cost on top of the money James Cameron needs to make the movie.)

After looking at these numbers on March 27, 2021, your new assistant starts pacing up and down and sweating profusely.  He exclaims:

“That @#$%^%$ Cameron has wasted our money!  If we give him the extra $400 million, then the total production costs will be $900 million.  Then we’ll have to spend another $300 million to market and release it—that’s a total of $1200 million in costs for this movie!  But we’ll only take in $950 million in sales revenue.  That means we’ll lose $250 million on this movie!

Then your assistant takes out a flask of whisky from his jacket pocket and starts guzzling it.  He shouts “Boss!  Don’t give Cameron the money to finish this movie!  This @#$%$#! movie is a loser!!!!!!”

Now answer the question on the next page.

Question: Regarding Titanic 2: It Didn’t Sink After All!

It’s March 27, 2021. Should you (Choose either (i) or (ii)):

• Give James Cameron the additional $400 million to finish the movie
• Cancel the movie

Carefully explain in a couple of paragraphs, including some calculations to support your explanation.

SAMPLE SOLUTION

From the case study on the production of Titanic 2 film, the best option is to give James Cameron the additional $400 million to finish the film’s production.  It is clear that Cameron has already spent $500 on the film production; this implies that canceling the production at this time will amount to a loss of $500. It means through all the investment into the ditch with zero possibility of recovering the investment. On the other hand, giving Cameron an additional $400 to continue with the film’s production and an…