Question

You have written a novel and are negotiating compensation terms with the publisher. The publisher offers you one of two alternatives for the right to publish your novel: (1) you get paid $200,000 today, but get no royalties from the sale of the book, or (2) you get paid $50,000 now and 10% of the gross sales revenue for the next five years. Assume that the projected sales are given by the table below. Your investments earn 3% APR compounded annually.

Which alternative is better and by how much in present value terms?

Year	Gross Sales Revenue
1	$400,000
2	$300,000
3	$200,000
4	$100,000
5	$50,000

Answer 1

Alternative 1

To get paid $ 200,000 today

Alternative 2

Year	Gross Sales Revenue	10% of Gross sales revenue
1	$400,000	$40,000.0
2	$300,000	$30,000.0
3	$200,000	$20,000.0
4	$100,000	$10,000.0
5	$50,000	$5,000.0

The present value of Alternative 2 = $ 50,000 + $ 40,000 1.03¹ + $ 30,000 1.03² + $ 20,0001.03³ + $ 10,0001.03⁴ + $ 5,0001.03⁵

The present value of Alternative 2 = $ 148,613.58

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Alternative 1 is better than alternative 2 in terms of present value terms, hence alternative 1 is to be chosen.