Question

10.) Bill Clinton reportedly was paid $10 million to write his book My Life. The book 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.

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

b. Assume that, once the book was finished, it was expected to generate royalties of $5 million in the first year (paid at the end of the year) and these royalties were expected to decrease at a rate of 30% per year in perpetuity. What is the NPV of the book with the royalty payments?

Answer 1

a)

NPV

Particulars	Year	PVIF@10%	Amount	Present Value
Advance received for writing the book	0	1	$10,000,000	$10,000,000
Less: Opportunity Cost (Writing speeches)	1-3	2.48685199098	$8,000,000	$19,894,815.93
NPV				(-)$9,894,815.93

b) The first royalty will be received at the end of year 4 (1 year after finishing the book). Also, we need to compute the terminal value of perpetual royalties at the end of year 4.

Terminal Value = Cash flows x (1 + g) / (Ke - g) = $5,000,000 x (1 + (-)0.30) / (0.10 - (-)0.30) = $8,750,000

NPV

Particulars	Year	PVIF@10%	Amount	Present Value
Advance received for writing the book	0	1	$10,000,000	$10,000,000
Add: First Royalty	4	0.68301345536	$5,000,000	$3,415,067.28
Add: Terminal value of royalties	4	0.68301345536	$8,750,000	$5,976,367.73
Less: Opportunity Cost (Writing speeches)	1-3	2.48685199098	$8,000,000	$19,894,815.93
NPV				(-)$503,380.92