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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 IRR for Larry's three-movie deal offer is closest to:
A)3.5%.
B)1.6%.
C)-3.5%.
D)-1.6%.

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Quizplus · Accepted Answer

The IRR is the discount rate that makes the NPV of a project equal to zero. In this case, the NPV of the three-movie deal is:NPV = -$14 million + $5 million/(1.10)^1 + $5 million/(1.10)^2 + $5 million/(1.10)^3Setting this equal to zero and solving for the IRR, we get:IRR = 3.5%

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