Question

Larry the Cucumber has been offered $14 million to star in the lead role of the next three Larry Boy adventure movies. If Larry takes this offer, he will have to forgo acting in other Veggie movies that would pay him $5 million at the end of each of the next three years. Assume Larry's personal cost of capital is 10% per year.

1# Explain why the NPV decision rule might provide Larry with a different decision outcome than the IRR rule when evaluating Larry's three movie deal offer.

(PLEASE provide formulas, Step-by-step process for all sections/parts, **don't use spreadsheet, I need to see the complete work out for all parts**)

Answer 1

NPV :
NPV = PV of Cash Inflows - PV of Cash Outflows
If NPV > 0 , Project can be accepted
NPV = 0 , Indifference point. Project can be accepted/ Rejected.
NPV < 0 , Project will be rejected.

Year	CF	PVF @10%	Disc CF
0	$ 1,40,00,000.00	1.0000	$ 1,40,00,000.00
1	$   -50,00,000.00	0.9091	$   -45,45,454.55
2	$   -50,00,000.00	0.8264	$   -41,32,231.40
3	$   -50,00,000.00	0.7513	$   -37,56,574.00
NPV	$    15,65,740.05

IRR :
IRR is the Rate at which PV of Cash Inflows are equal to PV of Cash Outflows.

IRR = Rate at which least +ve NPV - [ NPV at that Rate / Change in NPV due to 1% inc in disc rate ] * 1%

If IRR > Cost of Capital - Project can be accepted
IRR = Cost of Capital - Indifferebce Point - Project will be accepted / Rejected
IRR < Cost of Capital - Project will be erejected

Year	CF	PVF @4%	Disc CF	PVF @3%	Disc CF
0	$ 1,40,00,000.00	1.0000	$ 1,40,00,000.00	1	$ 1,40,00,000.00
1	$   -50,00,000.00	0.9615	$   -48,07,692.31	0.970874	$   -48,54,368.93
2	$   -50,00,000.00	0.9246	$   -46,22,781.07	0.942596	$   -47,12,979.55
3	$   -50,00,000.00	0.8890	$   -44,44,981.79	0.915142	$   -45,75,708.30
NPV	$      1,24,544.83		$     -1,43,056.77

= 4 % - [ 124544.83 / 267601.61 ]* 1%

= 4% - [ 0.47 *1% ]

= 4% - 0.47%

= 3.53%

Pls do rate, if the answer is correct and comment, if any further assistance is required.