Use the Information for the Question(s)below

question 114

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.What is the net present value (NPV) of this project if the film maker does not issue the new security? What is the net present value (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
• E)$5.0 million; $5.0 million

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Definitions:

Charge Differential

The difference in electric charge between two points, which can drive a current or induce movement of charges towards equalization.

Capacitor

Electrical charge storage device. Also known as a condenser.

Step-Up Transformer

A transformer that induces a higher voltage in its secondary coil by using a larger number of windings than in the primary coil.