Question

Bill Clinton reportedly was paid $15.0 million to write his book My Life. The book took...

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 9.6% 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 $ 4.9 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?

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Homework Answers

Answer #1

a.

NPV is calculated by discounting the cashflows

PV = C/(1+r)^n

C - Cashflow

r - Discount rate

n - years to the cashflow

Since the first cashflow is positive, Year 0 = $15

The potential loss of not giving speeches in the following year,

Year 0 = 15

Year 1 = -8.5

Year 2 = -8.5

Year 3 = -8.5

Choose NPV function in financial calculator or use the formula below to find NPV.

NPV = 15 - 8.5/(1+0.096)^1 - 8.5/(1+0.096)^2 - 8.5/(1+0.096)^3 = -6.29 million.

b.

Calculate the present value of growin perpetuity:

PV = C1/(R-g)

PV = 4.9/(0.096-(-0.3) = 12.37 million

PV at the end of 3 years = $12.37 million

NPV = -6.29 + 12.37/(1+0.096)^3 = $3.11 million

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