Professor Wendy Smith has been offered the following opportunity: A law firm would like to retain her for an upfront payment of $ 50 comma 000. In return, for the next year the firm would have access to eight hours of her time every month. As an alternative payment arrangement, the firm would pay Professor Smith's hourly rate for the eight hours each month. Smith's rate is $ 550 per hour and her opportunity cost of capital is 15 % per year. What does the IRR rule advise regarding the payment arrangement? (Hint: Find the monthly rate that will yield an effective annual rate of 15 %.) What about the NPV rule?
1.) What is the IRR?
2.) What is the NPV?
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