Reference no: EM132494529

John Howard reportedly was paid $ 420 000 to write his book Lazarus Rising. The book took three years to write. In the time he spent? writing, Howard could have been paid to make speeches. Given his significance as? Australia's second-longest serving Prime? Minister, assume that he could earn $ 320 000 per year? (paid at the end of the? year) speaking instead of writing. Assume his cost of capital is 9.5 % per year. Assume also that once the book is? finished, it is expected to generate royalties of $ 210 000 in the first year? (paid at the end of the? year) and these royalties are expected to decrease at 30 % per year in perpetuity. The NPV of the book with the royalty payments is -$382 850. How many IRRs are there in this? problem? Does the IRR rule work in this? case?

You own a coal mining company and are considering opening a new mine. The mine itself will cost $ 115.1 million to open. If this money is spent? immediately, the mine will generate $ 19.5 million for the next 10 years. After? that, the coal will run out and the site must be cleaned and maintained at environmental standards. The cleaning and maintenance are expected to cost $ 1.5 million per year in perpetuity. What does the IRR rule say about whether you should accept this? opportunity? If the cost of capital is 7.8 %?, what does the NPV rule? say?
What does the IRR rule say about whether you should accept this? opportunity? (Select the best choice? below.)

A. Accept the opportunity because the IRR is greater than the cost of capital.

B. There are two IRR?s, so you cannot use the IRR as a criterion for accepting the opportunity.

C. The IRR is r=9.74%?, so accept the opportunity.

D. Reject the opportunity because the IRR is lower than the 7.8 % cost of capital.