Use the Information for the Question(s)below

question 41

Multiple Choice

Use the information for the question(s) below.
An independent film maker is considering producing a new movie.The initial cost for making this movie will be $20 million today.Once the movie is completed,in one year,the movie will be sold to a major studio for $25 million.Rather than paying for the $20 million investment entirely using its own cash,the film maker is considering raising additional funds by issuing a security that will pay investors $11 million in one year.Suppose the risk-free rate of interest is 10%.
-Assuming that the film maker issues the new security,the NPV for this project is closest to what amount? Should the film maker make the investment?

• A)$1.7 million;Yes
• B)$1.7 million;No
• C)$2.7 million;Yes
• D)$2.7 million;No

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Definitions:

MSC

MSC, or Marginal Social Cost, is the total cost to society of producing one additional unit of a good or service, including both private costs and externalities.

Pollution

The introduction of harmful substances or products into the environment, leading to adverse effects on living organisms and ecosystems.

Emissions Tax

An emissions tax is designed to reduce environmental harm by charging a fee for the emission of pollutants, incentivizing businesses and individuals to decrease their environmental impact.

Socially Optimal

A condition or outcome that maximizes the well-being of society as a whole, often considered in economic policies or strategies.