Mary Is in Contract Negotiations with a Publishing House for Her

question 87

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) Rule II and III
• D) Rule I and II

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Definitions:

Package Carrier

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Private Fleet

A fleet of transportation vehicles owned and operated by a company for its own logistics and distribution needs.

Safety Inventory

Extra inventory held as a buffer against demand variability and supply chain disruptions to prevent stockouts.

Cycle Inventory

The portion of inventory that companies hold to facilitate smooth production and sales operations, fluctuating based on production cycle needs.