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Netflix New Original Series Investment

Model Created By: Daniella Comito


Model Updated On: 4/15/2014
Capital Budgeting Idea:

Netflix, Inc. can implement new capital budgeting ideas to create more value for their company. The idea presented in this mod
another new Original Series; like their prior series 'Orange is the New Black' and 'House of Cards'. The model presents this idea
highlighted in yellow under the year 2014. Each of the stages of creating a TV series are labeled; "Pre-Production", "Production
Netflix has seen prior success with their original series, giving them reason to explore creating more. There is also a possible si
season renewal (creating a second season of the original series). This capital budgeting opportunity would have a start up cost
payback of under a year.

Directions on the use of this Model:

This model is intended to be easily interpreted by any non-financial person. It has been created to make suggestions about stra
for Netflix, Inc. This model is a fully functioning model with imbedded formulas; when one cell is changed, other cells referencin
accordingly. It was created to forecast the worth (Net Present Value) of a possible future capital budgeting opportunity for Netflix
explored here is the possibility of creating another new original series, like Orange is the New Black. The NPV of this opportunit
green. This possible capital budgeting opportunity could be a deciding factor for another company that is looking at Netflix as a
capital budgeting projects with high positive NPV's add value to a company. In the use of this model, yellow values can be chan
based on different assumptions.

Critical Assumptions:

Critical assumptions about Netflix, Inc. have been made in order to forecast the NPV of a capital budgeting opportunity. All cells
represent assumptions, these can be changed to recognize value drivers. Green cells represent important decision measures w
million), IRR of 617% and payback period which is currently 0.2 years for the estimated opportunity. If these decision measures
investment would not be worth it. Data Tables are at the end of the model to show value drivers. Current levels of each value dr
green. Cells highlighted in blue represent a value that would increase the NPV even further. All critical assumptions include a so
given value; this is located directly to the right of the value.

Results of the Model and What they Mean:

The results of this model indicate that the new original series opportunity is a good investment for the company. This investmen
company today. This is shown by the positive NPV of $101 million and a positive IRR of 617%. Also, the payback for this invest
makes the investment worthwhile because the company would have the cash flows available to pay back the purchase of the e
expiration of their useful life. Through the use of data tables it was found that any of the value drives could be pushed very high
still come out positive. Even so it shows that Netflix could increase monthly rate to make the opportunity wort more. It was also
customers pushes NPV very high, this could be achieved by implementing new marketing to ensure that new customer goals ar
also reviewed some costs of the investment and neither increased salary costs nor increased equipment cost pushed the NPV

Recommendations:

Due to a positive NPV, IRR, and short payback period we would recommend investing in this opportunity. Through the use of Da
that assumptions would have to be pushed to extremes to make the project not worth while (result in a negative NPV). This opp
company and thus increase future cash flows.

Future Contact Information:


Preferred Method of Contact: E-Mail
Daniella Comito: daniella.comito@simmons.edu

Netflix Original Series Investment


Model Created By: Daniella Comito
Model Created On: 3/20/2014
Model Updated On: 4/15/2014
Yellow cells represent Assumptions
Green cells represent Decision Measures

Assumptions of the New Netflix Original Series


Pre-Production
January through February 2014
Total Cost of Idea Generation
Cost of Show creator per month
Work Weeks per Month
Cost of Show Creator Per Week
Number of Idea Generators
Total Cost of Casting
Number of Casting Weeks
Casting Cost Per Cast Director Per Week
Number of hours Cast Director works per week
Cost Per Casting Director Per Hour
Number of Casting Directors
Production
March through May 2014
Total Staff Writers Cost
Number of Staff Writes
Cost of One Staff Writer for Series
Number of Weeks
Cost per week of Staff Writer
Director of Photography Wage
Number of days worked by director of Photography
Director of Photography Daily Wage
Production Designer Wage
Number of days worked by production designer
Production Designer Daily Wage
Gaffer Wage
Number of hours worked by Gaffer
Number of Months gaffer works
Days in a Month
Number of Hours a Day
Gaffer Hourly Wage
Foley Mixer Wage
Number of hours worked by foley mixer
Foley Mixer Hourly Wage
Director Wage
Number of hours worked by Director
Director Hourly Wage
Total Lead Talent Wage

2014

$
$
$
$
$
$
$

$
$
$

72,000
24,000
4
6,000
3
5,100
2
850
25
34
3

720,000
9
80,000
10
8,000
$120,000
60
2,000
$24,000
60
$400
$9,600
480
3
20
8
$20
$12,000
480
$25
$20,160
480
$42
$1,500,000

Number of Lead Actors


Number of episodes worked by Lead Actors
Lead Actor Wage per Episode
Total Non-Leed Talent Wage
Number of Non-Leed Actors
Number episodes worked by non-Leed Actor
Non-Leed Actor Wage per Episode
Cost of Rent of Shooting Location
Number of Months Location is Rented
Rent per day
Number of days per Month
Cost of Equiptment (5 years useful life)
Depreciation
Book Value of Equiptment
Post-Production
June through August 2014
Total Editor Wage
Number of Episodes
Number of days Editing per Episode
Number of Hours Editing per day
Editor Hourly Wage
Airing of the Show Jan. 2015
Additional Revenue from New Customers per year
Revenue Per Customer Per Year
Growth of revenue per customer
Months Per Year
Monthly Netflix Rate Charged Per Customer
Number of New Customers due to New Series
Growth of customer base
Potential Side Effect Feb. 2016
Number of Seasons from Renewing Show
Additional Revenue from New Customers
Additonal Revenue Per Customer Per Year
Growth of revenue per customer
Months Per Year
Monthly Netflix Rate Charged Per Customer
Number of New Customers due to Extended Series
Growth of customer base
Extra Information
Cost of making DVDs per year
Inventory days
Inventory on balance sheet
Accounts Receivables Days
Accounts Receivables on the Balance Sheet
Tax rate
Discount rate
Cost of Debt
Cost of equity

3
10
$50,000
$1,000,000
20
10
$5,000
$150,000
3
2,500
20
$1,000,000

$16,000
10
8
8
$25

$1,200,000
7
23,014

34%
9.6%
6.5%
15%

Income Statement Cash Flows From New Original Series


Revenue from New Customers
Additional Revenue due to Extended Series
Cost of Idea Generation
Cost of Casting
Staff Writers Wage Expense
Director Wage Expense
Editor Wage Expense
Lead Actors Wage Expense
Non-Lead Actors Wage Expense
Foley Mixer Wage Expense
Gaffer Wage Expense
Director of Photography Wage Expense
Production Designer Wage Expense
Rent Expense
Cost of Producing DVDs
Depreciation Expense
Earnings before taxes
Taxes
Net Income
Operating Cash Flows

2014

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

72,000
5,100
720,000
20,160
16,000
1,500,000
1,000,000
12,000
9,600
120,000
24,000
150,000
1,200,000
(4,848,860)
1,648,612
(3,200,248)
(3,200,248)

2014
(1,000,000)

(23,014)

(1,023,014)

(4,223,261)

Balance Sheet Cash Flows From New Original Series


Cost of Equiptment
Accounts Receivables Cash Flows
Inventory Cash Flows
Terminal Value Estimate
Total Balance Sheet Cash Flows

Total Cash Flows


Decision Measures:
NPV
IRR
Payback Period

350,379,946
750%
0.2

Data Tables:
Green Cell Represents Current Values
Blue Cells Represent what gives Highest NPV
Number of New
Customers

Monthly Rate

2015

$
$
$

720,000
9
80,000
10
8,000
$120,000
60
2,000
$24,000
60
$400
$9,600
480
3
20
8
$20
$12,000
480
$25
$20,160
480
$42
$1,500,000

2016

2017

2018

3
10
$50,000
$1,000,000
20
10
$5,000
$150,000
3
2,500
20
20%
$800,000

20%
$600,000

20%
$400,000

48,903,594 $
97
1%

49,886,556 $
98
1%

505,000
1%

510,050
1%

515,151
1%

489,036 $
97 $
1%

498,866
98
1%

16,000
10
8
8
25

$
$

47,940,000 $
96

12
7.99
500,000

$
$

1
479,400 $
96 $
12
7.99
5,000

$
$

20%
$200,000

7
23,014 $
-15
(1,970,137) $
34%

7
23,014 $
-15
(2,009,737) $
34%

50% use of debt


50% use of equity

5050
1%

7
23,014 $
-15
(2,050,132) $
34%

50,889,276
99
1%

5101
1%

7
23,014
-15
(2,091,340)
34%

2015
47,940,000 $
$

$
$
$
$
$
$
$
$
$
$

720,000
20,160
16,000
1,500,000
1,000,000
12,000
9,600
120,000
24,000
150,000

$
$
$
$
$

200,000
44,368,240
(15,085,202)
29,283,038
29,483,038

$
$
$
$
$

2015

2016
48,903,594 $
479,400 $

200,000
49,382,994
(16,790,218)
32,592,776
32,792,776

$
$
$
$
$

2016

2017
49,886,556 $
489,036 $

200,000
50,375,592
(17,127,701)
33,247,891
33,447,891

$
$
$
$
$

2017

2018
50,889,276
498,866

200,000
51,388,142
(17,471,968)
33,916,173
34,116,173

2018

$
$

1,970,137 $
(23,014) $

39,600 $
(23,014) $

40,396 $
(23,014) $

41,208
(23,014)

1,947,123 $

16,586 $

17,382 $

18,194

31,430,162 $

32,809,362 $

33,465,273 $

34,134,367

of value added today given forecasts


per annum rate of return, based on forecasts
years, based on future cash flow estimates

NPV Varying Number of New Customers

NPV
$
50,000

350,379,946
Cost of Equipment

100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
550,000
600,000
650,000
700,000
750,000
800,000
850,000
900,000
950,000
1,000,000

NPV Varying Monthly Rate


NPV
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

0.99
1.99
2.99
3.99
4.99
5.99
6.99
7.99
8.99
9.99
10.99
11.99
12.99
13.99
14.99

350,379,946
Lead Actor Wage

2019

Assumptions/Explanations:

It will take a team of 3 writes to come up with a new show idea


It will only take one month to create the idea for the show
there are 4 weeks in a month
It costs 6000 a week for a show creator
there will be 3 idea generators http://defamer.gawker.com/heres-what-your-favori
Calculation
Casting only takes 2 weeks http://electronics.howstuffworks.com/tv-production.ht
Calculation
Casting is about 5 hours a day http://work.chron.com/much-money-casting-direct
It costs 34$ an hour for a casting director http://work.chron.com/much-money-cas
There will be 3 casting directors- http://electronics.howstuffworks.com/tv-product

calculation
There will be 9 people on this drama comedy series http://mentalfloss.com/article
calculation
The show will take 10 weeks to produce because it will only be 10 episodes for th
It costs 8000/week for a staff writer http://defamer.gawker.com/heres-what-your-f
Calculation
there are 60 days in 3 months
they make 2k a day
Calculation
there are 60 days in 3 months
make 400 a day http://www.ask.com/question/production-designer-salary
Calculation
Calculation
works for 3 months
works 20 days a month
works 8 hours a day
make $20/hr http://www.ehow.com/info_7756095_average-salary-gaffer.html
Calculation
Calculation
makes $25/ hr http://www.ehow.com/info_8424489_average-salary-foley-artist.htm
Calculation
Calculation
make $42/hr http://www.ehow.com/info_12003623_salary-director-television-show
Calculation

there are 3 main actors


there will be 10 episdoes
lead actors make 50k per episode http://www.huffingtonpost.com/2013/08/20/act
Calculation
there are 20 back up and non lead actors
there will be 10 episdoes
non leads make 5k an episode
Calculation
shooting lasts 3 months
it costs 2500/day to rent a shooting location http://www.nytimes.com/2003/02/16
there are 20 work days in a month
costs 1mil for production equiptment http://cybercollege.com/tvp007.htm
20% Striaghtline
$0 Calculation

Calculation
The series will be 10 episdoes
it takes 8 days to edit one episode https://ca.answers.yahoo.com/question/index?
it takes 8 hours a day to edit one episode https://ca.answers.yahoo.com/question
TV editors make $25/hr http://www.ehow.com/info_7735721_much-film-video-edit
$

$
$

$
$

51,912,150 Calculation
100 Calculation
1% Grow customer revenue each year by 1%
there are 12 months in a year
It cost customers 7.99/month for netflix
520,302 Customers will increase by 500k-Netflix has over 400 million customers and gains
1% Growth in customer base will be 1%
One or more seasons could be renewed
508,893 Calculation
99 Calculation
1% Growth in customer base will be 1%
Tehre are 12 months in a year
It cost customers 7.99/month for netflix
5152 Fewer Customers will join for extended series as opposed to a new series
1% Growth in customer base will be 1%

Netflix spends 1.2 million to produce DVDs too rent out to customers, this cost on
7 Inventory Days is 7 Days
23,014 Calculation
-15 Netflix collects money from customers 15 Days before providing service
(2,133,376) Calculation
34% Netflix Tax Rate is 34% http://csimarket.com/stocks/singleProfitabilityRatios.php?c
Calculation
50% of this investment will be financed through debt
50% of this investment will be financed through equity

$
$

2019
51,912,150
508,893

$
$
$
$
$

200,000
52,421,043
(17,823,155)
34,597,889
34,797,889

2019
$
$
$
$

42,036
(23,014)
360,786,817
360,805,840

395,603,728

NPV Varying Cost of Equipment


NPV
$ 350,379,946
$

250,000

$
$
$
$
$
$
$
$
$
$
$

500,000
750,000
1,000,000
1,250,000
1,500,000
1,750,000
2,000,000
2,250,000
2,500,000
2,750,000
3,000,000

NPV Varying Lead Actor Wage Per Episode


NPV
$ 350,379,946
$
$
$
$
$
$
$
$
$
$

10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000

how idea

com/heres-what-your-favorite-television-writers-make-1485130956/all

works.com/tv-production.htm

much-money-casting-director-make-14191.html
chron.com/much-money-casting-director-make-14191.html
wstuffworks.com/tv-production.htm

ttp://mentalfloss.com/article/15208/studio-6030-rock-tv-writing-numbers

l only be 10 episodes for the first season


wker.com/heres-what-your-favorite-television-writers-make-1485130956/all

ion-designer-salary

rage-salary-gaffer.html

erage-salary-foley-artist.html

ary-director-television-shows.html

onpost.com/2013/08/20/actors-salaries_n_3785074.html

w.nytimes.com/2003/02/16/realestate/lights-camera-action-location-fees.html

ge.com/tvp007.htm

yahoo.com/question/index?qid=20090201003908AA0Rt2m
nswers.yahoo.com/question/index?qid=20090201003908AA0Rt2m
35721_much-film-video-editors-make.html

million customers and gains around 4 million new customers each year

sed to a new series

ut to customers, this cost only happens once because the DVDs are rented not produced, so the inventory return

e providing service

ngleProfitabilityRatios.php?code=NFLX&itx

the inventory returns and is used again and the seasons cant be purchased elsewhere either https://answers.ya

her https://answers.yahoo.com/question/index?qid=20061007022938AAobDIm