1. A coin collector treasures his first edition $2 note because he found it in his pocket change, rather than purchasing it. He can sell it in the open market for $12000, but would only sell it for at least twice that price, due to its sentimental value to him. It is anticipated that the note will increase in market value in the foreseeable future. What is the value of the note?
A. $2, since he paid nothing to obtain the note and it has a face value of two dollars.
B. $12000, since this is the price that the note would fetch in the open market today.
C. At least $12000, since he could replace the note for $12000, but the note he owns has additional intangible value due to its sentimental value.
D. At least $12000, since the value of the note will increase in the future.
2. 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 net present value (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
These short questions belong to Finance. The 1st question is about assessing the value of an old $2 note. The 2nd question is about calculating the net present value of a movie project.
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