Capital Budget

Activity: Capital Budgeting Practice

Complete the following and submit it in a Word document. Be sure to show your process and calculations:

  1. 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)
  2. 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.
  3. 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.
  4. 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?

How to place an order?

Take a few steps to place an order on our site:

  • Fill out the form and state the deadline.
  • Calculate the price of your order and pay for it with your credit card.
  • When the order is placed, we select a suitable writer to complete it based on your requirements.
  • Stay in contact with the writer and discuss vital details of research.
  • Download a preview of the research paper. Satisfied with the outcome? Press “Approve.”

Feel secure when using our service

It's important for every customer to feel safe. Thus, at WritersABC, we take care of your security.

Financial security You can safely pay for your order using secure payment systems.
Personal security Any personal information about our customers is private. No other person can get access to it.
Academic security To deliver no-plagiarism samples, we use a specially-designed software to check every finished paper.
Web security This website is protected from illegal breaks. We constantly update our privacy management.

Get assistance with placing your order. Clarify any questions about our services. Contact our support team. They are available 24\7.

Still thinking about where to hire experienced authors and how to boost your grades? Place your order on our website and get help with any paper you need. We’ll meet your expectations.

Order now Get a quote