Question
Professor Wendy Smith has been offered the followingopportunity: A law firm would like to retain her for an upfront payment of $50,000. In return, for
Professor Wendy Smith has been offered the followingopportunity: A law firm would like to retain her for an upfront payment of $50,000. 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 ProfessorSmith's hourly rate for the eight hours each month. Smith's rate is $ 550 per hour and her opportunity cost of capital is 15 % per year. What does the IRR rule advise regarding the paymentarrangement? (Hint: Find the monthly rate that will yield an effective annual rate of 15 %.)
What about the NPV rule?
The IRR is ______. (Round to two decimal places.)
The IRR rule advises:
A.With an IRR of 15 % and with Smith's cost of capital at 13.44 %, according to the IRR rule, she should reject this opportunity.
B.Since the IRR is less than the cost of capital, 15 %, Smith should turn down this opportunity.
C.Since the IRR is less than the cost of capital, 15 %, Smith should accept this opportunity.
D. None of the above.
The NPV is $____. (Round to the nearest dollar.)
The NPV rule advises:
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.
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