Question 6: A CEO who led a famous turnaround at a large corporation has just retired. A publishing company has offered to pay her $2,000,000 today to spend the next two years writing a book about her experiences. Accepting this opportunity means that the author will give up lucrative speech opportunities over the next two years while she works on the book. She expects to make $1,100,000 per year giving speeches over the next two years if she does not accept the publishing opportunity. The former CEO estimates that 8% is a reasonable cost of capital for this project. What does the NPV rule say about this project? What does the IRR rule say about this investment? Should she accept the publishing deal? LO3 and LO4 Type: Multiple Choice Points Awarded: 0.000/1.000 User Answer(s): The project has a negative NPV, so the NPV rule says to reject the project. The project's IRR is less than the cost of capital, so the IRR rule says to reject the project. The author should reject the publishing deal. Rationale: Feedback: Section 9.3. Investment Decision Rules: NPV and IRR; Example 9.3.5. Delayed investment CF0 = 2,000,000 C01 = -1,100,000 F01 = 2 /= 8 NPV = $$38,408.78 IRR 6.60% =
Question 6: A CEO who led a famous turnaround at a large corporation has just retired. A publishing company has offered to pay her $2,000,000 today to spend the next two years writing a book about her experiences. Accepting this opportunity means that the author will give up lucrative speech opportunities over the next two years while she works on the book. She expects to make $1,100,000 per year giving speeches over the next two years if she does not accept the publishing opportunity. The former CEO estimates that 8% is a reasonable cost of capital for this project. What does the NPV rule say about this project? What does the IRR rule say about this investment? Should she accept the publishing deal? LO3 and LO4 Type: Multiple Choice Points Awarded: 0.000/1.000 User Answer(s): The project has a negative NPV, so the NPV rule says to reject the project. The project's IRR is less than the cost of capital, so the IRR rule says to reject the project. The author should reject the publishing deal. Rationale: Feedback: Section 9.3. Investment Decision Rules: NPV and IRR; Example 9.3.5. Delayed investment CF0 = 2,000,000 C01 = -1,100,000 F01 = 2 /= 8 NPV = $$38,408.78 IRR 6.60% =
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:Question 6:
A CEO who led a famous turnaround at a large corporation has just retired. A publishing company has offered to pay her $2,000,000 today to spend the next two years
writing a book about her experiences. Accepting this opportunity means that the author will give up lucrative speech opportunities over the next two years while she works on
the book. She expects to make $1,100,000 per year giving speeches over the next two years if she does not accept the publishing opportunity. The former CEO estimates that
8% is a reasonable cost of capital for this project. What does the NPV rule say about this project? What does the IRR rule say about this investment? Should she accept the
publishing deal? LO3 and LO4
Type: Multiple Choice
Points Awarded: 0.000/1.000
User Answer(s):
The project has a negative NPV, so the NPV rule says to reject the project. The project's IRR is less than the cost of capital, so the IRR rule says to reject the project.
The author should reject the publishing deal.
Rationale: Feedback: Section 9.3. Investment Decision Rules: NPV and IRR; Example 9.3.5. Delayed investment CF0 = 2,000,000 C01 = -1,100,000 F01 = 2 /= 8 NPV =
$$38,408.78 IRR 6.60%
=
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