Question

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 $ 8.5 million per year? (paid at the end of the? year) speaking instead of writing. Assume his cost of capital is 10.1 % 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 $ 5.3 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? a. What is the NPV of agreeing to write the book? (ignoring any royalty? payments)? The NPV of agreeing to write the book? (ignoring any royalty? payments) is ?$ _. ?(Round to the nearest? dollar.)

Answer 1

rate	10.1000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
15,000,000.00	0	15,000,000.00	15,000,000.00
(8,500,000.000)	1	(7,720,254.31)	7,279,745.69
(8,500,000.000)	2	(7,012,038.43)	267,707.25
(8,500,000.000)	3	(6,368,790.58)	(6,101,083.33)

a) NPV without royalties = -6,101,083.33

rate	10.1000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
15,000,000.00	0	15,000,000.00	15,000,000.00
(8,500,000.000)	1	(7,720,254.31)	7,279,745.69
(8,500,000.000)	2	(7,012,038.43)	267,707.25
(8,500,000.000)	3	(6,368,790.58)	(6,101,083.33)
13,216,957.606	3	9,903,062.96	3,801,979.63

PV of royalties at the end of 3rd year = 5,300,000/(0.101 + 0.3) = 13,216,957.606

NPV with royalties = 3,801,979.63