Use the Information for the Question(s) Below

question 6

Multiple Choice

Use the information for the question(s) below.
An independent Canadian 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 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%.
-What is the NPV of this project if the film maker does not issue the new security? What is the NPV if the film maker issues the new security?

• A) $1.7 million; $1.7 million
• B) $1.7 million; $2.7 million
• C) $2.7 million; $1.7 million
• D) $2.7 million; $2.7 million

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Definitions:

Feedback Control

A process by which information about the past or present influences the same phenomenon in the present or future, commonly used in management and engineering to regulate systems.

Mistakes

Actions or decisions that are incorrect or unwise, often leading to undesired outcomes.

Cost Report

A detailed report outlining the expenses incurred during a specific period of time, often used for budgeting and financial analysis.

Budget Overruns

The situation when the actual spending exceeds the planned or budgeted amount.