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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.
-Larry should:

Question

Use the information for the question(s) below. 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. -Larry should: A) Reject the offer because the NPV < 0 B) Accept the offer even though the IRR < 10%, because the NPV > 0 C) Reject the offer because the IRR < 10% D) Accept the offer because the IRR > 0%

Quizplus · Accepted Answer

B) NPV = 14 + -5 / (1.10)¹ + -5 / (1.10)₂ + -5 / (1.10)³ = 1.57 CF₀ = +14 CF₁ = -5 CF₂ = -5 CF₃ = -5 Compute IRR = 3.53%

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