Question

Bill Clinton reportedly was paid 10 million to write his book My Life. The book took three years to write. In the time he spent writing, Clinton could have been paid to make speeches. Given his popularity, assume that he could earn 8 million per year (paid at the end of the year) speaking instead of writing. Assume his cost of capital is 10% per year.

What is the IRR of agreeing to write the book (ignoring any royalty payments)? Should Clinton agree to write the book (ignoring any royalty payments)? Why?

Answer 1

Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= $10. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 60.74%.  

Net present value is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= $10. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the cost of capital of 10%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is -$9.89 million.

Therefore, Clinton should not agree to write the book ignoring royalty payments since it results in a negative net present value.

In case of any query, kindly comment on the solution.