Mary Is in Contract Negotiations with a Publishing House for Her

question 3

Multiple Choice

Mary is in contract negotiations with a publishing house for her new novel.She has two options.She may be paid $100,000 up front,and receive royalties that are expected to total $26,000 at the end of each of the next five years.Alternatively,she can receive $200,000 up front and no royalties.Which of the following investment rules would indicate that she should take the former deal,given a discount rate of 8%? Rule I: The Net Present Value rule
Rule II: The Payback Rule with a payback period of two years
Rule III: The internal rate of return (IRR) Rule

• A) Rule I only
• B) Rule III only
• C) Rules II and III
• D) Rules I and II
• E) Rules I and III

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Definitions:

Foreign Subsidiary

A foreign subsidiary is a company that is owned or controlled by another company but operates in a different country from the parent company.

Parent Company

is a corporation that owns enough voting stock in another firm to control its board of directors and therefore its operational and financial policies.

Forward Rate

The agreed-upon exchange rate for a currency pair to be traded at a future date, used in forward contracts.

Exchange Rate

The cost of converting one currency into another, establishing the equivalent worth of one currency in relation to another.