Capital Budgeting Practice Excel Task
Assume you have just retired as the CEO of a successful company. A major publisher has offered you a book deal. The publisher will pay you $1 million up front if you agree to write a book about your experiences. You estimate that it will take three years to write the book. The time you spend writing will cause you to give up speaking engagements amounting to $500,000 per year. You estimate your opportunity cost to be 10%.
Should you accept this deal? Plot a diagram that measures NPV (on the y-axis) vs. discount rate (on the x-axis) to solve this problem. (Hint: Have your scale on the x-axis go to 50% (discount rate)).
Determine the IRR for this deal. (Hint: IRR is the point at which NPV = 0)
Suppose you inform the publisher that it needs to sweeten the deal before you will accept it. The publisher offers $550,000 advance and $1,000,000 in four years when the book is published.
Should you accept or reject the new offer? Again, plot a diagram that measures NVP (on the y-axis) vs. discount rate (on the x-axis) to solve this problem. (Hint: Have your scale on the x-axis go to 50% (discount rate)).
Determine the IRRs for this deal (Hint: There are two IRRs for this problem).
Discuss if the IRR rule for making budgetary decisions can be used in this case.
Finally, you are able to get the publisher to increase your advance to $750,000, in addition to the $1 million when the book is published in four years.
Should you accept or reject this new offer? Again, plot a diagram that measures NVP (on the y-axis) vs. discount rate (on the x-axis) to solve this problem. (Hint: Have your scale on the x-axis go to 50% (discount rate)).
Determine the IRR for this deal.
State three conclusions regarding the use of IRR vs. NPV that you can make from questions 2–4. Which is the stronger method to use (IRR or NPV), and why?
Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.
You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.Read more
Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.Read more
Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.Read more
Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.Read more
By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.Read more