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 $535 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?
Assume monthly rate =i | ||||
(1+i)^12=(1+0.15) | ||||
1+i=1.15^(1/12)= | 1.011715 | |||
i=monthly interest rate | 0.011715 | |||
Present Value of cash flow: | ||||
(cash flow)/((1+i)^N) | ||||
i=discount rate =0.011715 | ||||
N=Month of Cash Flow | ||||
CASH FLOW : | ||||
If the Second option (monthly payment) is chosen | ||||
Opportunity cost in month 0 | ($49,000) | |||
Cash Inflow in every month =8*535 | $4,280 | |||
N | CF | PV=CF/(1.011715^N) | ||
Month | Cash Flow | Present Value | ||
0 | ($49,000) | ($49,000) | ||
1 | $4,280 | $4,230.44 | ||
2 | $4,280 | $4,181.45 | ||
3 | $4,280 | $4,133.04 | ||
4 | $4,280 | $4,085.18 | ||
5 | $4,280 | $4,037.87 | ||
6 | $4,280 | $3,991.12 | ||
7 | $4,280 | $3,944.90 | ||
8 | $4,280 | $3,899.22 | ||
9 | $4,280 | $3,854.07 | ||
10 | $4,280 | $3,809.45 | ||
11 | $4,280 | $3,765.34 | ||
12 | $4,280 | $3,721.74 | ||
SUM | ($1,346) | |||
NPV =SUM of PV= | ($1,346) | |||
IRR=Internal rate of return | -0.44% | (Using IRR function of excel over Cash Flow) | ||
IRR rule advises to take lump sum payment | ||||
NPV rule advises to take lump sum payment | ||||
Professor Wendy Smith has been offered the following opportunity: A law firm would like to retain her for an upfront pa...
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 $550 per hour and her opportunity cost of capital is 15% per year. What does...
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 15% per year. What does...
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 $555 per hour and her opportunity cost of capital is 15% per year. What does...
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...
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 $545 per hour and her opportunity cost of capital is 15% per year. What does...
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Professor Wendy Smith has been offered the following deal: 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. Smith's rate is $550 per hour, and her opportunity cost of capital is 15% (equivalent annual rate, EAR). What is the IRR (annual)? What does the IRR rule advise regarding this opportunity? What is the NPV? What does...
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please do not use Excel I want to see the longhand steps The image is fine. Professor Wendy Smith has been offered the following opportunity. A law firm would like to retain her for an upfront payment of $48.000. In retum, 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...
Problem 8-18 Professor Wendy Smith has been offered the following deal: A law firm would like to retain her for an up- front payment of $50,000. In return, for the next year the firm would have access to eight hours of her time every 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 this opportunity? What about the NPV rule? Complete the steps below using...