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hittps/ udent/Player Homework.aspx?homeworkld-4504721338questionld- 18flushed-false&icld-47209098; centerwin-yes MGMT 326- Fundamentals of Corporate Finance-Berk/DeMarzo Gabriel Pacheco& 4/8/18 10:41 AM Homework: Chapter 8 Homework Score: 0 of 1pt P 8-18 (similar to) Save 7of 16 (3 complete) HW Score: 15 63%,25 of 16 pts E Question Help ig Professor Wendy Smith has been offered the tollowing opportunity Alwm ould like to retain her for an upfront payment et $s o0 mn rntunm h ae 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 P hours each month. Smith's rate is $5 35 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? The IRR is?%. (Round to two decimal places.) Enter your answer in the answer box and then click Check Answer

Explanation / Answer

Cash Outflow $49,000 PMT(monthly) = 8 hours x $535 per hour -$4,280 Period 12 Period Cashflow 0 49000 1 -$4,280 2 -$4,280 3 -$4,280 4 -$4,280 5 -$4,280 6 -$4,280 7 -$4,280 8 -$4,280 9 -$4,280 10 -$4,280 11 -$4,280 12 -$4,280 IRR (monthly) 0.73% Annual effective rate = (1+0.73%)^12 -1 9.14% She should turn down this opportunity because IRR is less than Cost of Capital. NPV Effective monthly rate =[ (1+15%)^(1/12)] -1 1.17% Period Cashflow PV @ 1.17% Present Value 0 $49,000 1.0000 $49,000 1 -$4,280 0.9884 -$4,230.5 2 -$4,280 0.9770 -$4,181.58 3 -$4,280 0.9657 -$4,133.22 4 -$4,280 0.9545 -$4,085.42 5 -$4,280 0.9435 -$4,038.17 6 -$4,280 0.9326 -$3,991.47 7 -$4,280 0.9218 -$3,945.31 8 -$4,280 0.9111 -$3,899.69 9 -$4,280 0.9006 -$3,854.59 10 -$4,280 0.8902 -$3,810.01 11 -$4,280 0.8799 -$3,765.95 12 -$4,280 0.8697 -$3,722.4 NPV $1,341.68 Npv is positive so the correct decision is to accept the deal. Smith can also be relatively confident in this decision.To reverse the decision her cost of capital would have to be 15% – 9.14% = 5.86%

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