Academic Publishing is trying to decide which of two books to publish. The larger book will cost $100,000 to publish and print. Sales are expected to produce an annual profit of $32,000 for five years. The smaller book will cost $60,000 to publish and print, and should generate an annual profit of $20,000 for five years.
a. Calculate the internal rate of return on each book. On the basis of their IRRs, which book should be published?
b. Which book should be published if the firm’s cost of capital is 17%?
c. Which book should be published if the firm’s cost of capital is 14%?