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Bill Clinton reportedly was paid $10 million to write his book My Life. Suppose 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 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)?PV of losing the speaking fees? _____NPV of book deal? ______b). Assume that, once the book is finished, it is expected to generate royalties of $5 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?PV of perpetuity at year 3? _____PV of perpetuity at year 0?_____NPV of book deal?_____

Question

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

PV of losing the speaking fees? _____

NPV of book deal? ______

b). Assume that, once the book is finished, it is expected to generate royalties of $5 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?

PV of perpetuity at year 3? _____

PV of perpetuity at year 0?_____

NPV of book deal?_____

 

check_circleAnswer
Step 1

All financials below are in $ mn.

Part (a)

Speaking fees, F = 8 per year for N = 3 years

cost of capital, R = 10% per year

Hence, PV of losing the speaking fees =PV of annuity of (-F) = -F / R x [1 -(1 + R)-N] = -8 / 10% x [1 - (1 + 10%)-3] = -19.8948 

Hence, PV of losing the speaking fees? -19.8948

Step 2

Hence, NPV of book deal = C0 + PV of losing the spea...

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