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:

Variable Overhead Spending Variance

The difference between the actual variable overheads incurred and the expected costs based on standard overhead rates.

Standard Quantity

The expected or predetermined amount of materials or input required to produce a single unit of product.

Standard Price

A predetermined cost assigned to materials, labor, and overhead, used as a benchmark against which the actual costs are compared.