Question

Bill Clinton reportedly was paid $15.0 million to write his book MyLife. 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 $8.6 million per year​ (paid at the end of the​ year) speaking instead of writing. Assume his cost of capital is 10.2% 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 $5.4 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?

Answer 1

a)
	Year	0	1	2	3
	Book fee	15
	Lost speech income		-8.6	-8.6	-8.6
	Net cashflow	15	-8.6	-8.6	-8.6
	Discount factor(10.2%)	1	0.91	0.82	0.75	1/(1+r)^n
	Present value(net cf* DF)	15	-7.826	-7.052	-6.45
	Net Present value(sum of present values) =		-6.328

b)	Present value of royalty payments after three years = 5.4/(10.2%+30%) = 13.43
	PV of $13.43m = 13.43 * PVF(10.2%,3 years)
	= $10.03m
	Therefore, NPV = -6.328 + 10.03 = 3.702