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Professor Wendy Smith has been offered the following​ deal: A law firm would like to retain her for an upfront payment of $56,000.

In​ return, for the next​ year, the firm would have access to eight hours of her time every month. ​ Smith's rate is $594 per​ hour, and her opportunity cost of capital is 15%

​(equivalent annual​ rate, EAR). What is the IRR​ (annual)?

What is the IRR​ (annual)?

The IRR​ (annual) is %. (Round to two decimal​ places.)

b). What does the IRR rule advise regarding this​ opportunity?

c) What is the​ NPV? What does the NPV rule say about this​ opportunity? (Round to two decimal​ places.)

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Hubert Koch
Hubert KochLv2
28 Sep 2019

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Professor Wendy Smith has been offered the following​ deal: A law firm would like to retain her for an upfront payment of $60,000. In​ return, for the next​ year, the firm would have access to eight hours of her time every month.​ Smith's rate is $630 per​ hour, and her opportunity cost of capital is 17% ​(equivalent annual​ rate, EAR). What is the IRR​ (annual)? What is the​ NPV?

Professor Wendy Smith has been offered the following​ deal: A law firm would like to retain her for an upfront payment of $60,000. In​ return, for the next​ year, the firm would have access to eight hours of her time every month.​ Smith's rate is $630 per​ hour, and her opportunity cost of capital is 17% ​(equivalent annual​ rate, EAR). What is the IRR​ (annual)? What is the​ NPV?

Jack Smith reportedly was paid $10.1 million to write his book The Fork in the RoadThe Fork in the Road. The book took three years to write. In the time he spent​ writing, Jack Smith could have been paid to make speeches. Given his​ popularity, assume that he could earn $8.2 million a year​ (paid at the end of the​ year) speaking instead of writing. If his cost of capital is 10% per​ year, then the NPV of agreeing to write the book​ (ignoring any royalty​ payments) is -$10,292,186.

How many IRRs are there in this​ problem? Does the IRR rule give the right answer in this​ case? (Note: Consider the upfront payment as a positive cash flow and the opportunity cost of missed speaking fees as negative cash​ flows.)

The IRR is _____ ​(Round to two decimal​ places.)

How many IRRs are there in this​ problem? ​(Select the best choice​ below.)

A.

One IRR

B.

Three IRRs

C.

Two IRRs

D.

Four IRRs

Does the IRR rule give the right answer in this​ case?  ​(Select the best choice​ below.)

A.

​Yes, because the IRR​ (62.14%​) is greater than the cost of capital.

B.

​Yes, because the NPV is positive.

C.

​No, because the IRR is negative.

D.

​No, because the NPV is negative ​(−$10,292,186​), and therefore the IRR gives the wrong answer.

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