Use the following information to answer the questions below

Use the following information to answer the question(s) below You are considering investing in a start up project at a cost of 100,000. You expect the project to return S500,000 to you in seven years. Given the risk of this project, your cost of capital is 20%. 1) The NPV for this project is closest to: 2) The IRR for this project is closest to: 3) The decision you should take regarding this project is A) reject the project since the NPV is negative. B) reject the project since the NPV is positive. C) accept the project since the IRR 20%. Explanation: Use the following information to answer the question(s) below Sarah Palin reportedly was paid a S11 million advance to write her book Going Rogue. The book took one year to write. In the time she spent writing, Palin could have been paid to give speeches and appear on TV news as a political commentator Given her popularity, assume that she could have earned S8 million over the year (paid at the end of the year) she spent writing the book. Assume that she was unable to fulfill her media commitments of appearing on TV news as a political commentator or give speeches.while she was writing the book 4) Assuming that Palin\'s cost of capital is 10%, then the NPV of her book deal is closest to: 5) The IRR of Palin\'s book deal is closest to: Use the following information to answer the question(s) below: Frank Dewey Esquire from the firm of Dewey, Cheatum, and Howe, has been offered an upfront retainer of S30,000 to provide legal services over the next 12 months to Taggart Transcontinental. In return for this upfront payment, Taggart Transcontinental would have access to 8 hours of legal services from Frank for each of the next 12 months. Frank\'s normal billable rate is $250 per hour for legal services. 6) Assuming that Dewey\'s cost of capital is 12% EAR, then the NPV of his retainer offer is closest to

Solution

Initial Expenditure = 100,000
Return in 7 years = 500,000
Cost of capital = 20%
1) NPV = 500,000/(1 + 20%)⁷ - 100,000 = 39,540.82

2) NPV = 0 = 100,000 = 500000/(1 + IRR)⁷
(1 + IRR)⁷ =  500000/100,000
IRR = (500000/100,000)^(1/7) - 1 = 0.2585 or 25.85%

3) Option d. Accept the project because IRR is greater than 20%. Other options are incorrect beacuse NPV is positive and project should be accepted. When IRR is greater than cost of capital project should be accepted. Hence the project will add value to the firm.

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