Professor Wendy Smith has been offered the following opportunity: A law firm would like to retain upfront payment of $50,000. 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 $540 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%. (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 accept this opportunity. OB. Since the IRR is less than the cost of capital, 15%, Smith should turn down this opportunity. OC. With an IRR of 15% and with Smith's cost of capital at 6.94%, according to the IRR rule, she should reject this opportunity. OD. None of the above. The NPV is $. (Round to the nearest dollar.) The NPV rule advises: (Select the best choice below.) O A. Since the NPV is negative, the correct decision is to accept the upfront retainer. OB. Even though the NPV is positive, the IRR is high enough to accept the upfront retainer. OC. Even though the NPV is negative, the IRR is below the cost of capital, so the correct decision is to reject the upfront payment. OD. None of the above.
Professor Wendy Smith has been offered the following opportunity: A law firm would like to retain upfront payment of $50,000. 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 $540 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%. (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 accept this opportunity. OB. Since the IRR is less than the cost of capital, 15%, Smith should turn down this opportunity. OC. With an IRR of 15% and with Smith's cost of capital at 6.94%, according to the IRR rule, she should reject this opportunity. OD. None of the above. The NPV is $. (Round to the nearest dollar.) The NPV rule advises: (Select the best choice below.) O A. Since the NPV is negative, the correct decision is to accept the upfront retainer. OB. Even though the NPV is positive, the IRR is high enough to accept the upfront retainer. OC. Even though the NPV is negative, the IRR is below the cost of capital, so the correct decision is to reject the upfront payment. OD. None of the above.
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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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 $50,000. 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 $540 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
The IRR rule advises:
.…..
%. (Round to two decimal places.)
(Select the best choice below.)
OA. Since the IRR is less than the cost of capital, 15%, Smith should accept this opportunity.
OB. Since the IRR is less than the cost of capital, 15%, Smith should turn down this opportunity.
OC. With an IRR of 15% and with Smith's cost of capital at 6.94%, according to the IRR rule, she should
reject this opportunity.
OD. None of the above.
The NPV is $
(Round to the nearest dollar.)
The NPV rule advises: (Select the best choice below.)
A. Since the NPV is negative, the correct decision is to accept the upfront retainer.
B. Even though the NPV is positive, the IRR is high enough to accept the upfront retainer.
OC. Even though the NPV is negative, the IRR is below the cost of capital, so the correct decision is to
reject the upfront payment.
OD. None of the above.
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