Question

1. Bill Clinton reportedly was paid $15.0 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 $8.9 million per year​ (paid at the end of the​ year) speaking instead of writing. Assume his cost of capital is 9.7% per year.

a. What is the NPV of agreeing to write the book​ (ignoring any royalty​ payments)?

b. Assume​ that, once the book is​ finished, it is expected to generate royalties of $4.9 million in the first year​ (paid at the end of the​ year) and these royalties are expected to decrease at a rate of 30% per year in perpetuity. What is the NPV of the book with the royalty​ payments?

2.

OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship will cost $498 ​million, and will operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $68.9 million and its cost of capital is 11.9%.

a. Prepare an NPV profile of the purchase.

b. Identify the IRR on the graph.

c. Should OpenSeas proceed with the​ purchase?

d. How far off could​ OpenSeas' cost of capital estimate be before your purchase decision would​ change?

3.

Innovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are $4.98 million. The product is expected to generate profits of

$1.03 million per year for ten years. The company will have to provide product support expected to cost $93,000 per year in perpetuity. Assume all profits and expenses occur at the end of the year.

a. What is the NPV of this investment if the cost of capital is 5.7%​?

Should the firm undertake the​ project? Repeat the analysis for discount rates of 1.7% and 12.9%​, respectively.

b. What is the IRR of this investment​ opportunity?  

c. What does the IRR rule indicate about this​ investment?

Answer 1