Use the Information for the Question(s)below

question 132

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%.
-Refer to the information above.Without issuing the new security,the net present value (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
• E)$5.0 million; Yes.

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Definitions:

Contractual Obligations

Duties that are legally required to be performed under the terms of a contract.

Foreseeable Loss

Losses that could have been anticipated or predicted as a consequence of an action or inaction, relevant in determining liability.

Non Est Factum

A defense in contract law where a party claims they were mistaken about the nature of the document signed, not merely its terms.

Caveat Emptor

A Latin phrase meaning "let the buyer beware," placing the responsibility on the buyer to perform due diligence before making a purchase.