Question

You are offered a consulting arrangement in which you will be paid $75,000 today in return for 4 years of a certain number of hours of your time in consulting work. Based on your billing rate and the hours involved, you decide your time is worth $25,000 per year (timed at the end of each of the 4 years). You use a cost of capital of 11%. Which of the following statements is true in its entirety? Pay close attention to the signs (negative/positive)

a.	The NPV rule recommends rejecting the deal while the IRR rule recommends accepting the deal, and according to the class notes the deal should be accepted.
	b.	The NPV rule recommends accepting the deal while the IRR rule recommends rejecting the deal, and according to the class notes the deal should be accepted.
	c.	Both the NPV rule and the IRR rule recommend rejecting the deal, and according to the class notes the deal should be rejected.
	d.	Both the NPV rule and the IRR rule recommend accepting the deal, and according to the class notes the deal should be accepted.
	e.	None of the above

Answer 1

As IRR> Cost of capital and NPV >0 ,

Answer is d) Both the NPV rule and the IRR rule recommend accepting the deal, and according to the class notes the deal should be accepted.

Formulae

Formulae as above