Assume you have just retired as the CEO of a successful company. A major publisher has offered you a book deal. The publisher will pay you $1 million up front if you agree to write a book about your experiences.
Complete the following and submit it in a Word document. Be sure to show your process and calculations:
Assume you have just retired as the CEO of a successful company. A major publisher has offered you a book deal. The publisher will pay you $1 million up front if you agree to write a book about your experiences. You estimate that it will take three years to write the book. The time you spend writing will cause you to give up speaking engagements amounting to $500,000 per year. You estimate your opportunity cost to be 10%.
Should you accept this deal? Plot a diagram that measures NPV (on the y-axis) vs. discount rate (on the x-axis) to solve this problem. (Hint: Have your scale on the x-axis go to 50% (discount rate)).
Determine the IRR for this deal. (Hint: IRR is the point at which NPV = 0)
Suppose you inform the publisher that it needs to sweeten the deal before you will accept it. The publisher offers $550,000 advance and $1,000,000 in four years when the book is published.
Should you accept or reject the new offer? Again, plot a diagram that measures NVP (on the y-axis) vs. discount rate (on the x-axis) to solve this problem. (Hint: Have your scale on the x-axis go to 50% (discount rate)).
Determine the IRRs for this deal (Hint: There are two IRRs for this problem).
Discuss if the IRR rule for making budgetary decisions can be used in this case.
Finally, you are able to get the publisher to increase your advance to $750,000, in addition to the $1 million when the book is published in four years.
Should you accept or reject this new offer? Again, plot a diagram that measures NVP (on the y-axis) vs. discount rate (on the x-axis) to solve this problem. (Hint: Have your scale on the x-axis go to 50% (discount rate)).
Determine the IRR for this deal.
State three conclusions regarding the use of IRR vs. NPV that you can make from questions 2–4. Which is the stronger method to use (IRR or NPV), and why?
When making important financial decisions for your business, it is crucial to understand the difference between IRR and NPV. These two methods are used to calculate different aspects of a project’s financial success, and it can be tricky to determine which one is better for your specific needs. In this blog post, we will break down the pros and cons of IRR vs. NPV so that you can make an informed decision about which one is right for you.
IRR, or internal rate of return, is a method of calculating the expected profitability of a project. It takes into account the time value of money and provides a more accurate picture of a project’s true financial potential. However, IRR can be complicated to calculate, and it often requires specialized software. NPV, or net present value, is another method of calculating the expected profitability of a project. Unlike IRR, NPV does not take into account the time value of money. This makes it simpler to calculate, but it also means that it may not provide as accurate of a picture as IRR.
So, which one should you use? The answer depends on your specific needs. If you are looking for a more accurate picture of a project’s potential profitability, then IRR is the better choice. However, if you need a simpler method that is easier to calculate, then NPV may be the better option for you. Ultimately, the decision about which one to use comes down to your own personal preferences and needs. Whichever method you choose, just make sure that you understand how it works and what it can tell you about your project before making any final decisions.
Do you have experience using IRR or NPV? We would love to hear from you in the comments below!
Pros:
-More accurate than NPV
-Takes into account the time value of money
Cons:
-Complicated to calculate
-Requires specialized software
Pros:
-Simpler to calculate than IRR
-Does not require specialized software
Cons:
-Less accurate than IRR
-Does not take into account the time value of money. This can provide a less accurate picture of a project’s potential profitability.
Ultimately, the decision about which one to use comes down to your own personal preferences and needs. Whichever method you choose, just make sure that you understand how it works and what it can tell you about your project before making any final decisions. Do you have experience using IRR or NPV?