1. Stanley Jaffe and Sherry Lansing have just purchased the rights to Corporate Finance:

The Motion Picture. They will produce this major motion picture on either a small budget or a big budget. The estimated cash flows are

Because of high risk, a 25-percent discount rate is considered appropriate. Sherry wants to adopt the large budget because the NPV is higher. Stanley wants to adopt the small budget because the IRR is higher. Who is right?

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Small budget Large budget Cash Flow at Date 0 -$10 million -25 million Cash Flow at Date 1 $40 million 65 million NPV @ 25% IRR 300% 27 million 160 $22 million