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In: Finance
Avril Skatergirl is trying to decide which recording contract she should accept and wishes it wasn’t...
Avril Skatergirl is trying to decide which recording contract she should accept and wishes it wasn’t so complicated that she can’t keep her head above water amidst all the numbers. Getting it right could be worth more than just a nickel back. Her opportunity cost is 5% p.a.
I’m With You Productions Inc. offers a payment of $2 million now on her next album plus 50% royalty on gross sales of $5 million for two years, with the royalties paid at the end of years 2 and 3. It will launch a line of Skatergirl branded clothing and other gear, paying $100,000 royalty on gross sales for five years, with the first payment end of year 1. How much is this contract worth?
Nobody’s Home Ltd. Offers no advances, but 70% gross royalty on the next album (same sales pattern) and a guaranteed starring role in a film about a girl who overcomes Lyme Disease to play right wing for Canada’s National Women’s Hockey Team. She would be paid $3 million in two years' time for the film role. How much is this contract worth?
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Expert Solution
She should take contract from Nobody’s Home Ltd whose worth of $8,919,123.20 is GREATER than that of I’m With You Productions Inc which is $6,860,115.36
| I’m With You Productions Inc | Nobody’s Home Ltd | |
| 01-01-2021 | 20,00,000.00 | 0.00 |
| 01-01-2022 | 1,00,000.00 | 0.00 |
| 01-01-2023 | 26,00,000.00 | 65,00,000.00 |
| 01-01-2024 | 26,00,000.00 | 35,00,000.00 |
| 01-01-2025 | 1,00,000.00 | 0.00 |
| 01-01-2026 | 1,00,000.00 | 0.00 |
| NPV@5% | 68,60,115.36 | 89,19,123.20 |
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