Jack Smith reportedly was paid $10.2 million to write his book The 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 $8.5 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 $10,938,242. 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.) O A. Two IRRS OB. Four IRRS O C. One IRR O D. Three IRRs Does the IRR rule give the right answer in this case? (Select the best choice below.) O A. No, because the NPV is negative (-$10,938,242), and therefore the IRR gives the wrong answer. O B. No, because the IRR is negative. O C. Yes, because the IRR (64.67%) is greater than the cost of capital. O D. Yes, because the NPV is positive.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question

#22

Jack Smith reportedly was paid $10.2 million to write his book The 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 $8.5 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 $10,938,242. 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.)
()
O A. Two IRRs
O B. Four IRRS
OC. One IRR
OD. Three IRRs
Does the IRR rule give the right answer in this case? (Select the best choice below.)
O A. No, because the NPV is negative (-$10,938,242), and therefore the IRR gives the wrong answer.
O B. No, because the IRR is negative.
O C. Yes, because the IRR (64.67%) is greater than the cost of capital.
O D. Yes, because the NPV is positive.
Transcribed Image Text:Jack Smith reportedly was paid $10.2 million to write his book The 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 $8.5 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 $10,938,242. 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.) () O A. Two IRRs O B. Four IRRS OC. One IRR OD. Three IRRs Does the IRR rule give the right answer in this case? (Select the best choice below.) O A. No, because the NPV is negative (-$10,938,242), and therefore the IRR gives the wrong answer. O B. No, because the IRR is negative. O C. Yes, because the IRR (64.67%) is greater than the cost of capital. O D. Yes, because the NPV is positive.
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps with 2 images

Blurred answer
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education