Question

Frank Dewey Esquire from the firm of Dewey, Cheatum, and Howe, has been offered an upfront retainer of $30,000 to provide legal services over the next 12 months to Taggart Transcontinental. In return for this upfront payment, Taggart Transcontinental would have access to 8 hours of legal services from Frank for each of the next 12 months. Frank's normal billable rate is $250 per hour for legal services. Assuming that Dewey's cost of capital is 12% EAR, then the IRR of his retainer offer is closest to:

Answer 1

Answer:

-39.3%

Explanation:

Calculation for the IRR of his retainer offer

First step is to find Opportunity Cost

Opportunity Cost= 8 hours × $250 per hour

Opportunity Cost = $2,000

Since we have known the monthly Opportunity Cost the second step will be to compute IRR

Present Value= $30,000

N = 12

PMT = -2,000

FV = 0

Now let compute the IRR

IRR= -3.276502% × 12

IRR= -39.3180% Approximately - 39.3%

Therefore the IRR of his retainer offer is closest to: - 39.3%