Stuart has been offered $14 million to star in the lead role of the next three Minions adventuremovies. If Stuart takes this offer, he will have to forgo acting in other Despicable Me moviesthat would pay him $5 million at the end of each of the next three years. Assume Stuart'spersonal cost of capital is 10% per year.(a) Calculate the IRR for Stuart's three-movie deal offer using Excel.(b) Whether Stuart should accept or reject the offer? Briefly explain your answers.

The Internal Rate of Return (IRR) for Stuart's Three-Movie Deal Offer can be calculated using Excel.…

Answered: Stuart has been offered $14 million to…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Professor Wendy Smith has been offered the following opportunity: A law firm would like to retain her for an upfront payment of $49,000. 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 $550 per hour and her opportunity cost of capital is 16% 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 16%.) What about the NPV rule? The annual IRR is ☐ %. (Round to two decimal places.)
John and Sally Claussen are considering the purchase of a hardware store from John Duggan. The Claussens anticipate that the store will generate cash flows of $81,000 per year for 20 years. At the end of 20 years, they intend to sell the store for an estimated $510,000. The Claussens will finance the investment with a variable rate mortgage. Interest rates will increase twice during the 20-year life of the mortgage. Accordingly, the Claussens’ desired rate of return on this investment varies as follows: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Years 1–5 7 % Years 6–10 9 % Years 11–20 11 % Required: PV of $81,000 cash flow PV of $510,000 selling price Maximum paid for store Years 1-5 ? Years 6-10 ? Years 11-20 ? Year 20 ? ? Total ? + ? = ? What is the maximum amount the Claussens should pay John Duggan for the hardware…
Marco as a Mechatronics Engineer is earning an average annual salary of $5M for 10 years. A private company would like to acquire his services and offers him an initial salary of $3M but is increasing at the rate of $400,000 annually. If money is worth 10% is Viel going to accept the offer?
Bill Williams has the opportunity to invest in project A that costs $6,900today and promises to pay $2,100, $2,400, $2,400, $2,000 and $1,800over the next 5 years. Or, Bill can invest $6,900 in project B that promises to pay $1,500, $1,500, $1,500, $3,600 and $4,000 over the next 5 years. (Hint: For mixed stream cash inflows, calculate cumulative cash inflows on a year-to-year basis until the initial investment is recovered.) a. How long will it take for Bill to recoup his initial investment in project A? b. How long will it take for Bill to recoup his initial investment in project B? c. Using the payback period, which project should Bill choose? d. Do you see any problems with his choice?
After a bad accident Anton receives a large sum in compensation. He is thinking about using it to invest in a stretch limousine to hire out for special occasions. The cost of the limousine is £100,000. Anton is due to retire in six years, at which stage he thinks he will be able to sell the limousine for £40,000. The net cash inflows for the venture, after allowing for the driver's wages and other direct expenses are: End of year Net cash flow (£) 1 10,000 2 15,000 3 20,000 4 20,000 5 20,000 6 15,000 (a) Find the payback period for this venture. (b) Calculate the net present value using a discount rate of 8%.
Yuri is willing to invest $35,000 for six years, and is an economically rational investor. He has identified three investment alternatives (X, Y, and Z) that vary in their method of calculating interest and in the annual interest rate offered. Since he can only make one investment during the six-year investment period, complete the following table and indicate whether Yuri should invest in each of the investments. Note: When calculating each investment’s future value, assume that all interest is earned annually. The final value should be rounded to the nearest whole dollar. Investment Interest Rate and Method Expected Future Value Make this investment? X 9% compound interest Y 12% compound interest Z 12% simple interest
A businessman plans to purchase a new house costing P 500 000. He can raise the building by issuing a 10%, 25-year-old bond that would pay P 150 000 interest per year and repay the face amount at maturity. Instead of buying the new house, he has the option of leasing it for P 140 000 per year, the first payment due one year from now. The building has an expected life for 25 years. If the interest charge for leasing is 8%, which is more favorable for the businessman, borrow and buy or lease?
Bob buys a property that costs $1,000,000. The property is projected to generate NOI as follows: Year NOI 1 $100,000 2 $105,000 3 $110,000 Bob will own the property for two years. Bob will sell the property at the end of year 2 at a cap rate that is 250 basis points lower than the cap rate at which he bought the property. Assume Bob finances his purchase with a 50% LTV Fixed Rate IO loan at an annual rate of 5% with annual compounding and annual payments. What is Bob’s annualized IRR for the investment in question? A. 83.54% B. 52.38% C. 78.93% D. 79.71%
Professor Wendy Smith has been offered the following opportunity: A law firm would like to retain her for an upfront payment of $49,000. 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 $550 per hour and her opportunity cost of capital is 16% 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 16%.) What about the NPV rule? The annual IRR is 14.96 %. (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, 16%, Smith should turn down this opportunity. OB. With an IRR of 16% and with Smith's cost of capital at 14.96%, according to the IRR rule, she should reject this opportunity. C. Since the IRR is less than the cost of capital, 16%,…
Mike Mulligan wants to expand his heavy equipment business into excavation. He plans to buy a used excavator for $300,000. The excavator requires an inventory of spare parts worth $ 10,000. These investments will occur immediately. Mulligan will operate the excavation business for two years and expects EBITDA of $200,000 at the end of each year. He will close his business at the end of the second year, sell the equipment for $100,000 and liquidate the inventory of spare parts. Mulligan pays a tax rate of 25%. Using this information, compute the appropriate values for operating cash flow, investments in net working capital, CAPEX and free cash flow for each year of the project.
Anthony has just won the Flyball Lottery. He has two options for receiving his prize. The first option is to accept a $133,000 cash payment today. The second option is to receive $20,000 at the end of each of the next 19 years and a $33,500 lump sum payment in the 20th year. Anthony can invest money at a 11% rate. Click here to view the factor table. (a) Calculate the present value of the two options. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971.) Option 1 Option 2 Present value $ $ Which option should Anthony choose to receive his winnings? Option 2 Option 1 (b) If Anthony could invest money at 14%, calculate the present value of the two options. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971.) Option 1 Option 2 Present value $ $ Which option should he choose?
Ginny Trueblood is considering an investment which will cost her $120,000. The investment produces no cash flows for the first year. In the second year the cash inflow is $35,000. This inflow will increase to $55,000 and then $75,000 for the following two years before ceasing permanently. Ginny requires a 10 % rate of return and has a required payback period of three years. Should Ginny accept this project? Justify your response. What are the major drawbacks of the Payback method ? What other method would you recommend to use and why?

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