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:

Chebyshev's Theorem

A statistical theorem that gives an inequality for assessing the probability that a random variable differs from its mean.

Empirical Rules

A statistical rule stating that for a normal distribution, nearly all data will fall within three standard deviations of the mean.

Interquartile Range

A measure of variability, calculated as the difference between the third (75th percentile) and first quartile (25th percentile), that indicates the middle 50% of the data.

Midrange

The statistical measure calculated as the mean of the highest and lowest values in a data set, providing a simple estimation of the data’s central tendency.