Final answer:
To determine the IRR of Frank Dewey Esquire's retainer offer, we must compare the $30,000 upfront payment to the value of the services he is providing, which would be $24,000 at his normal rate. With his cost of capital at 12%, the IRR would be lower than this figure as the upfront payment exceeds the present value of the legal services provided.
Step-by-step explanation:
We are tasked with calculating the Internal Rate of Return (IRR) for Frank Dewey Esquire's retainer offer from Taggart Transcontinental. Frank's normal billable rate is $250 per hour. Over 12 months, with 8 hours of legal services each month, the total value of services rendered would be 8 hours x 12 months x $250/hour = $24,000.
However, Frank has been offered a $30,000 retainer, which is a payment upfront. To calculate the IRR, we would compare this $30,000 initial payment to the series of cash flows that Frank is forgoing by accepting the retainer, which are the monthly earnings of 8 hours x $250. Since Frank is effectively providing his services at a discounted rate compared to his normal hourly billing, the IRR is the discount rate that would make the present value of these cash flows ($24,000) equal to the upfront payment of $30,000.
Considering Frank's cost of capital is 12% EAR, the IRR must be calculated using a financial calculator or software capable of handling this type of calculation, as the equation for IRR cannot be solved algebraically. The IRR is the rate that equates the present value of the future cash flows from the services to the upfront retainer payment. In this scenario, given the parameters, the IRR would be less than 12% EAR since the upfront payment is higher than the value of services provided at the normal billing rate.