Use the Information for the Question(s)below

question 56

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%.
-Without issuing 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:

Warranty Of Title

A guarantee provided by a seller to a buyer that they legally own the item being sold and have the right to sell it, free from any claims by others.

Security Interest

A legal claim or lien on property, both real and personal, granted to secure the performance of an obligation, often the repayment of a loan.

Provincial Personal Property

Property, excluding real estate, owned by individuals or entities within a specific province.

Automobile

A self-propelled vehicular machine designed primarily for transportation of people or goods over roads.