Professor Wendy Smith has been offered the following opportunity: A law firm would like to retain...
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Professor Wendy Smith has been offered the following opportunity: 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 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 12% 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 12%.) What about the NPV rule? The annual IRR is 6.94 %. (Round to two decimal places.) The IRR rule advises: (Select the best choice below.) A. With an IRR of 12% and with Smith's cost of capital at 6.94%, according to the IRR rule, she should reject this opportunity. B. Since the IRR is less than the cost of capital, 12%, Smith should turn down this opportunity. C. Since the IRR is less than the cost of capital, 12%, Smith should accept this opportunity. D. None of the above. The NPV is $ 1,220.71. (Round to the nearest cent.) The NPV rule advises: (Select the best choice below.) A. Since the NPV is positive, the correct decision is to accept the upfront retainer. B. Even though the NPV is positive, the IRR is high enough to accept the upfront retainer. OC. Even though the NPV is negative, the IRR is below the cost of capital, so the correct decision is to reject the upfront Davment. Professor Wendy Smith has been offered the following opportunity: 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 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 12% 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 12%.) What about the NPV rule? The annual IRR is 6.94 %. (Round to two decimal places.) The IRR rule advises: (Select the best choice below.) A. With an IRR of 12% and with Smith's cost of capital at 6.94%, according to the IRR rule, she should reject this opportunity. B. Since the IRR is less than the cost of capital, 12%, Smith should turn down this opportunity. C. Since the IRR is less than the cost of capital, 12%, Smith should accept this opportunity. D. None of the above. The NPV is $ 1,220.71. (Round to the nearest cent.) The NPV rule advises: (Select the best choice below.) A. Since the NPV is positive, the correct decision is to accept the upfront retainer. B. Even though the NPV is positive, the IRR is high enough to accept the upfront retainer. OC. Even though the NPV is negative, the IRR is below the cost of capital, so the correct decision is to reject the upfront Davment.
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