Mary is in contract negotiations with a publishing house for her new novel. She has two options. She may be paid $100,000 up front, and receive royalties that are expected to total $26,000 at the end of each of the next five years. Alternatively, she can receive $200,000 up front and no royalties. Which of the following investment rules would indicate that she should take the former deal, given a discount rate of 8%?
Rule I: The Net Present Value rule
Rule II: The Payback Rule with a payback period of two years
Rule III: The internal rate of return (IRR) Rule
A) Rule I only
B) Rule III only
C) Rule II and III
D) Rule I and II

Question

Quizplus · Accepted Answer

A) Using a financial calculator, enter CF0 = 100,000, CF1 = 26,000, F1 = 5;
calculate NPV for I = 8 = $203,810, which is greater than $200,000.

Mary Is in Contract Negotiations with a Publishing House for Her