reportedly was paid $ 9.8 million to write his book The Fork in the Road. The...

reportedly was paid $ 9.8 million to write his book The Fork in the Road. The book took three years to write. In the time he spent writing, Jack Smith could have been paid to make speeches. Given his popularity, assume that he could earn $ 8.3 million a year (paid at the end of the year) speaking instead of writing. If his cost of capital is 10 % per year, then the NPV of agreeing to write the book (ignoring any royalty payments) is negative $ 10,840,872. How many IRRs are there in this problem? Does the IRR rule give the right answer in this case? (Note: Consider the upfront payment as a positive cash flow and the opportunity cost of missed speaking fees as negative cash flows.)

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Expert Solution

There is only 1 IRR in this problem, since the sign is changing only once.

However it does not give the right answer. It is greater than the cost of capital while NPV is negative. Since NPV is negative, the proposal should not be accepted.

Year	Amount received upfront	Loss of revenue from speeches	Net CF
0	9800000		9800000
1		-8300000	-8300000
2		-8300000	-8300000
3		-8300000	-8300000

		NPV	-10840871.53
		IRR	66.27%

jeff jeffy answered 1 month ago

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