Question

13. During 2020 internationally renowned singer Molly Vanilli is somewhat fed up with singing. A publisher closely related to the music industry offers her to write her memoires from next year onwards and offers her an upfront payment of $1,000,000 now. If she is able to come up with a draft of the first 100 pages in two years time she will receive another payment of $750,000. The book needs to be ready in 4 years. If she succeeds to deliver a publishable manuscript at the end of year 4 she will receive another $2,000,000. In the meantime she cannot give concerts all around the globe which implies an opportunity cost equal to $750,000 per year until and including year 4. Assume a discount rate of 10%. The Net Present Value of this offer comes closest to...

A) $608,000 B) $609,000 C) $610,000 D) $611,000

Answer 1

NPV = PV of Cash Inflows - PV of Cash Outflows ( Opportunity COst)

PV of Cash Inflows:

Year	CF	PVF @10%	Disc CF
0	$ 10,00,000.00	1	$ 10,00,000.00
1	$                     -	0.909091	$                     -
2	$   7,50,000.00	0.826446	$   6,19,834.71
3	$                     -	0.751315	$                     -
4	$ 20,00,000.00	0.683013	$ 13,66,026.91
PV of Cash Inflows	$29,85,861.62

PV of Cash Outflows:

Year	CF	PVF @10%	Disc CF
1	$   7,50,000.00	0.909091	$   6,81,818.18
2	$   7,50,000.00	0.826446	$   6,19,834.71
3	$   7,50,000.00	0.751315	$   5,63,486.10
4	$   7,50,000.00	0.683013	$   5,12,260.09
PV of Cash Outflows	$23,77,399.08

NPV = PV of Cash Inflows - PV of Cash Outflows ( Opportunity COst)

= $ 2985861.62 - $ 2377399.08

= $ 608,462.54

As it has +ve NPV, Accept the Project

PVF(r%, n) = 1 / (1+r)^n

PVF(10%, 1) = 1 / (1+0.10)^1

= 1 / ( 1.1^1)

= 1 / 1.1

= 0.9091

PVF(10%, 2) = 1 / (1+0.10)^2

= 1 / ( 1.1^2)

= 1 / 1.21

= 0.8264

Like this we can calculate for remaining Years also.