Question

14

Bill Clinton reportedly was paid

$ 15.0$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

$ 8.7$8.7

million per year? (paid at the end of the? year) speaking instead of writing. Assume his cost of capital is

10.5 %10.5%

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

$ 5.1$5.1

million in the first year? (paid at the end of the? year) and these royalties are expected to decrease at a rate of

30 %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

?$nothing.

?(Round to the nearest? dollar.)b. Assume? that, once the book is? finished, it is expected to generate royalties of

$ 5.1$5.1

million in the first year? (paid at the end of the? year) and these royalties are expected to decrease at a rate of

30 %30%

per year in perpetuity. What is the NPV of the book with the royalty? payments? The NPV of the book with the royalty payments is?

?

Answer 1

a.

Payment for write book = $15 million.

Earnings from speaches = $8.70 million

Cost of capital = 10.50%.

Tenure = 3 year

Present value annual earning from speaches is calculated in excel and screen shot provided below:

Present value annual earning from speaches is $21.45 million.

NPV of Book Write = $15 - $21.45

= -$6.45 million.

NPV of book write is -6.45 million.

b.

If he get royalities of $5.10 million after book complete which is decrase by 30% per annum.

Value of royalities at end of year 3 = $5.10 / (10.50% + 30%)

= $5.10 / 40.50%

= $12.59 million.

Present value of royalities = $12.59 / (1 + 10.50%) ^ 3

= $12.59 / 1.3492

= $9.33 million.

Now, NPV of book Writing = $15 + $9.33 - $21.45

= $2.88 million.

Now, NPV of book writing is $2.88 million.