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Jack Smith reportedly was paid $10.1 million to write his book The Fork in the RoadThe For

Jack Smith reportedly was paid $10.1 million to write his book The Fork in the RoadThe For

Jack Smith reportedly was paid $10.1 million to write his book The Fork in the RoadThe Fork in the Road. The book took three years to write. In the time he spent writing, Jack Smith could have been paid to make speeches. Given his popularity, assume that he could earn $8.2 million a year (paid at the end of the year) speaking instead of writing. If his cost of capital is 10% per year, then the NPV of agreeing to write the book (ignoring any royalty payments) is -$10,292,186.

How many IRRs are there in this problem? Does the IRR rule give the right answer in this case? (Note: Consider the upfront payment as a positive cash flow and the opportunity cost of missed speaking fees as negative cash flows.)

The IRR is _____ (Round to two decimal places.)

How many IRRs are there in this problem? (Select the best choice below.)

A.

One IRR

B.

Three IRRs

C.

Two IRRs

D.

Four IRRs

Does the IRR rule give the right answer in this case?(Select the best choice below.)

A.

Yes, because the IRR (62.14%) is greater than the cost of capital.

B.

Yes, because the NPV is positive.

C.

No, because the IRR is negative.

D.

No, because the NPV is negative ($10,292,186), and therefore the IRR gives the wrong answer.

Abhinav 04-Dec-2019

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