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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.
-The NPV of Larry's three-movie Larry Boy offer is closest to:
A)3.5 million.
B)-1.6 million.
C)1.6 million.
D)-1.0 million.

Question

Quizplus · Accepted Answer

The NPV of the offer is $14 million minus the present value of the $5 million he would have earned in the other movies. The present value of the $5 million he would have earned in the other movies is $5 million / (1 + 0.1)^1 + $5 million / (1 + 0.1)^2 + $5 million / (1 + 0.1)^3 = $12.4 million. Therefore, the NPV of the offer is $14 million - $12.4 million = $1.6 million.

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