Professor Wendy Smith has been offered the following opportunity: A law firm would like to retain her for an upfront payment of $48,000. In return, for the next year the firm would have access to eight hours of her time every month. As an alternative payment arrangement, the firm would pay Professor Smith's hourly rate for the eight hours each month. Smith's rate is $535 per hour and her opportunity cost of capital is 15% per year. What does the IRR rule advise regarding the payment arrangement? (Hint. Find the monthly rate that will yield an effective annual rate of 15%.) What about the NPV rule? The annual IRR is 13.44 %. (Round to two decimal places.) The IRR rule advises: (Select the best choice below.) A. Since the IRR is less than the cost of capital, 15%, Smith should turn down this opportunity. OB. Since the IRR is less than the cost of capital, 15%, Smith should accept this opportunity. OC. With an IRR of 15% and with Smith's cost of capital at 13.44%, according to the IRR rule, she should reject this opportunity. OD. None of the above. The NPV is $31,898.34 (Round to the nearest cent.)
Professor Wendy Smith has been offered the following opportunity: A law firm would like to retain her for an upfront payment of $48,000. In return, for the next year the firm would have access to eight hours of her time every month. As an alternative payment arrangement, the firm would pay Professor Smith's hourly rate for the eight hours each month. Smith's rate is $535 per hour and her opportunity cost of capital is 15% per year. What does the IRR rule advise regarding the payment arrangement? (Hint. Find the monthly rate that will yield an effective annual rate of 15%.) What about the NPV rule? The annual IRR is 13.44 %. (Round to two decimal places.) The IRR rule advises: (Select the best choice below.) A. Since the IRR is less than the cost of capital, 15%, Smith should turn down this opportunity. OB. Since the IRR is less than the cost of capital, 15%, Smith should accept this opportunity. OC. With an IRR of 15% and with Smith's cost of capital at 13.44%, according to the IRR rule, she should reject this opportunity. OD. None of the above. The NPV is $31,898.34 (Round to the nearest cent.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Transcribed Image Text:Professor Wendy Smith has been offered the following opportunity: A law firm would like to
retain her for an upfront payment of $48,000. In return, for the next year the firm would
have access to eight hours of her time every month. As an alternative
payment arrangement, the firm would pay Professor Smith's hourly rate for the eight hours
each month. Smith's rate is $535 per hour and her opportunity cost of capital is 15% per
year. What does the IRR rule advise regarding the payment arrangement? (Hint. Find the
monthly rate that will yield an effective annual rate of 15%.) What about the NPV rule?
The annual IRR is 13.44 %. (Round to two decimal places.)
The IRR rule advises: (Select the best choice below.)
A. Since the IRR is less than the cost of capital, 15%, Smith should turn down this
opportunity.
OB. Since the IRR is less than the cost of capital, 15%, Smith should accept this
opportunity.
OC. With an IRR of 15% and with Smith's cost of capital at 13.44%, according to the
IRR rule, she should reject this opportunity.
OD. None of the above.
The NPV is $31,898.34 (Round to the nearest cent.)
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