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Take a Test Tiata Anderson-Google Chrome Secure https//www.mathol.com/Student/Player Test.aspxtestld 1704 MGMT 273 Fall Tara Anderson Quiz: Chapter 8 Quiz Submt Qutz This Question: 1 pt or 14 (0 complete) This Quiz: 14 pts possible Professor Wendy Smith has been offered the following opportunity A law fiem would like to retain her for an uptront payment of $50,000 in return, for the next year the firm would have access to eight hours of her Sime every month As an altemative payment arrangement the fem 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 the IRR nie advise regarding the payment arrangement? (Hint Find the monthly rate that wl yield an effective annual rate of 15% ) what about the NPV rule? The IRR is(Round to two decimal places) The IRR rule advises (Select the best choice below OA B. oc. OD. Since the iRR s less than the cost of capital 15% Smith should turn down this opportunity Sice the lRR is less ~n the cost of capital 15% Srnie, should accept this opportunity with an RR' 15% and with Smits cost of capital at 1067%, according to the RR rule she should reject his opportunity None of the above ha! s (Round ?othe nearest dalar ) The NPV is The NPV rule advises (Select the best choice below A. Even though the NPV is posibeth4 RR is high enough to accept the uptoresainer e OB. Even though the NPV is negative the IRR is below the cost of capital, so the cormect decision is to reject the upthont payment m/)C. Since te NPV is negative the correct decision isto accept the uptont retainer D. None of the above 06-29-2013 Battle of GettysburgI Wilkes Barre Scribd

Explanation / Answer

Cash Outflow $50,000 PMT(monthly) = 8 hours x $550 per hour -$4,400 Period 12 Period Cashflow 0 50000 1 -4400 2 -4400 3 -4400 4 -4400 5 -4400 6 -4400 7 -4400 8 -4400 9 -4400 10 -4400 11 -4400 12 -4400 IRR (monthly) 0.85% Annual effective rate = (1+0.85%)^12 -1 10.67% Option A 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 @ 15% Present Value 0 $50,000 1 $50,000 1 -$4,400 0.988420733 -$4,349.05 2 -$4,400 0.976975546 -$4,298.69 3 -$4,400 0.965662885 -$4,248.92 4 -$4,400 0.954481217 -$4,199.72 5 -$4,400 0.943429025 -$4,151.09 6 -$4,400 0.932504808 -$4,103.02 7 -$4,400 0.921707086 -$4,055.51 8 -$4,400 0.911034394 -$4,008.55 9 -$4,400 0.900485284 -$3,962.14 10 -$4,400 0.890058324 -$3,916.26 11 -$4,400 0.879752102 -$3,870.91 12 -$4,400 0.869565217 -$3,826.09 NPV $1,010.06 option A is correct npv is positive

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