Stanley Jaffe and Sherry Lansing have just purchased the rights to Corporate Finance: The Motion Picture. They will produce this major motion picture on either a small budget or a big budget. Here are the estimated cash flows:Because of high risk, a 25 percent discount rate is considered appropriate. Sherry wants to adopt the large budget because the NPV is higher. Stanley wants to adopt the small budget because the IRR is higher. Who is right?
Stanley Jaffe and Sherry Lansing have just purchased the rights to Corporate Finance: The Motion Picture. They will produce this major motion picture on either a small budget or a big budget. Here are the estimated cash flows:Because of high risk, a 25 percent discount rate is considered appropriate. Sherry wants to adopt the large budget because the NPV is higher. Stanley wants to adopt the small budget because the IRR is higher. Who is right?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Stanley Jaffe and Sherry Lansing have just purchased the rights to
Transcribed Image Text:Stanley Jarre and Sherry Lansing have just purchased the rights to Corporate Finance: The Motion Picture. They will produce this major motion picture on either a small budget
or a big budget. Here are the estimated cash flows:
Cash Flow at
Date I
Cash Flow at
Date 0
-$10 million
-25 million
NPV
@25%
Small budget
Large budget
Because of high risk, a 25 percent discount rate is considered appropriate. Sherry wants to adopt the large budget because the NPV is higher. Stanley wants to adopt the small
budget because the IRR is higher. Who is right?
$40 million
65 million
IRR
$22 million
300%
27 million 160
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