Assume you have just retired as the CEO of a successful company.?A major publisher has offered you a book deal. The publisher
Assume you have just retired as the CEO of a successful company. A major publisher has offered you a book deal. The publisher will pay you $1 million up front if you agree to write
1. Activity: Capital Budgeting Practice
Complete the following and submit it in a Word document. Be sure to show your process and calculations:
1. Should you accept this deal? Plot a diagram that measures NPV (on the y-axis) vs. discount rate (on the x-axis) to solve this problem. (Hint: Have your scale on the x-axis go to 50% (discount rate)).
1. Determine the IRR for this deal. (Hint: IRR is the point at which NPV = 0)
. Suppose you inform the publisher that it needs to sweeten the deal before you will accept it. The publisher offers $550,000 advance and $1,000,000 in four years when the book is published.
2. Should you accept or reject the new offer? Again, plot a diagram that measures NVP (on the y-axis) vs. discount rate (on the x-axis) to solve this problem. (Hint: Have your scale on the x-axis go to 50% (discount rate)).
2. Determine the IRRs for this deal (Hint: There are two IRRs for this problem).
2. Discuss if the IRR rule for making budgetary decisions can be used in this case.
. Finally, you are able to get the publisher to increase your advance to $750,000, in addition to the $1 million when the book is published in four years.
3. Should you accept or reject this new offer? Again, plot a diagram that measures NVP (on the y-axis) vs. discount rate (on the x-axis) to solve this problem. (Hint:Have your scale on the x-axis go to 50% (discount rate)).
3. Determine the IRR for this deal.
. State three conclusions regarding the use of IRR vs. NPV that you can make from questions 2–4. Which is the stronger method to use (IRR or NPV), and why?
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