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

$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?

Question content area bottom

Part 1

The annual IRR is

enter your response here%.

(Round to two decimal places.)

Part 2

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.

B.With an IRR of

15%

and with Smith's cost of capital at

11.05%,

according to the IRR rule, she should reject this opportunity.

C.Since the IRR is less than the cost of capital,

15%,

Smith should turn down this opportunity.

D.

None of the above.

Part 3

The NPV is

$enter your response here.

(Round to the nearest dollar.)

Part 4

The NPV rule advises:(Select the best choice below.)

A.

Even though the NPV is positive, the IRR is high enough to accept the upfront retainer.

B.

Even though the NPV is negative, the IRR is below the cost of capital, so the correct decision is to reject the upfront payment.

C.

Since the NPV is negative, the correct decision is to accept the upfront retainer.

D.

None of the above.