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 with complete certainty. 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 5%.

Without issuing the new security, the NPV for this project is closest to what amount? Should the film maker make the investment? A) $1.5 million; Yes B) $1.5 million; No C) $1.8 million; Yes D) $1.8 million; No E) None of the above

Please give formula and detailed solutions

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 with complete certainty. 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 S11 million in one year. Suppose the risk-free rate of interest is 5%. Without issuing the new security, the NPV for this project is closest to what amount? Should the film maker make the investment? A) $1.5 million: Yes B) $1.5 million: No C) $1.8 million: Yes D) $1.8 million; No E) None of the above