1.Does the IRR rule agree with the NPV rule in Problem 3? Explain.
2.Professor Wendy Smith has been offered the following deal: A law firm would like to retain her for an upfront payment of $50,000. In return, for the next year the firm would have access to 8 hours of her time every month. Smith’s rate is $550 per hour and her opportunity cost of capital is 15% (EAR). What does the IRR rule advise regarding this opportunity? What about the NPV rule?
3.Innovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are $5 million. The product is expected to generate profits of $1 million per year for 10 years. The company will have to provide product support expected to cost $100,000 per year in perpetuity. Assume all profits and expenses occur at the end of the year.
a. What is the NPV of this investment if the cost of capital is 6%? Should the firm undertake the project? Repeat the analysis for discount rates of 2% and 12%.
b. How many IRRs does this investment opportunity have?
c. Can the IRR rule be used to evaluate this investment? Explain