Question

Bill Clinton reportedly was paid $ 9.7 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 $ 8.5 million a year? (paid at the end of the? year) speaking instead of writing. Assume his cost of capital is 9.8 % per year. Assume also that once the book is? finished, it is expected to generate royalties of $ 4.67 million in the first year? (paid at the end of the? year) and these royalties are expected to decrease at 30 % per year in perpetuity. The NPV of the book with the royalty payments is negative ?$2,649,000.

How many IRRs are there in this? problem? Does the IRR rule work in this? case?

Answer 1

	Discount rate	NPV(b)	NPV (a)				9.80%	Rs. -17.75	9.7
	0%	-0.23333	-15.80
	2%	-1.06099	-14.81
	4%	-1.67765	-13.89
	6%	-2.12887	-13.02
	8%	-2.44954	-12.21
	10%	-2.64895	-11.51
	12%	-2.80125	-10.72
	14%	-2.86997	-10.03
	16%	-2.88599	-9.39
	18%	-2.85985	-8.78
	20%	-2.8	-8.21
	22%	-2.71328	-7.66
	24%	-2.60523	-7.14
	26%	-2.48037	-6.65
	28%	-2.34237	-6.18
	30%	-2.19425	-5.74
	32%	-2.03849	-5.31
	34%	-1.87711	-4.91
	36%	-1.71178	-4.52
	38%	-1.54389	-4.16
	40%	-1.37455	-3.81
	42%	-1.2047	-3.47
	44%	-1.03508	-3.15
	46%	-0.86633	-2.84
	48%	-0.69895	-2.55
	50%	-0.53333	-2.26
	52%	-0.36982	-1.99
	54%	-0.20867	-1.73
	56%	-0.05008	-1.48
	58%	0.105784	-1.24
	60%	0.258811	-1.01
	62%	0.408914	-0.79
	64%	0.556036	-0.57
	66%	0.700142	-0.36
	68%	0.841216	-0.16
	70%	0.979259	0.03
	72%	1.114284	0.21
	74%	1.246315	0.39
	76%	1.375384	0.57
	78%	1.501532	0.73
	80%	1.624804	0.90
	82%	1.745249	1.05
	84%	1.862922	1.21
	86%	1.977879	1.35
	88%	2.090178	1.49
	90%	2.199879	1.63
	92%	2.307042	1.77
	94%	2.411728	1.90
	96%	2.513999	2.02
	98%	2.613916	2.14
	If there are more then 1 IRR then the IRR analysis is irrelevent and it will not work in that cash
	As we can se from the NPV profile the NPV (a) has only one IRR ( as its NPV =0 is only at one point)i.e. around 69;
	But for NPV (b) there are 2 IRR one is around 0 and the other around 57
	As there are more then 2 IRR for the problen IRR will not work here.