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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
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. Here are the estimated cash flows: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?
or a big budget. Here are the estimated cash flows: \begin{tabular}{lcccc} & CashFlowatDate0 & CashFlowatDateI & NPV@25% & IRR \\ \hline Small budget & $10 million & $40 million & $22 million & 300% \\ Large budget & -25 million & 65 million & 27 million & 160 \end{tabular} 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 rightStep by Step Solution
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