Question

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 $8.6 million per year​ (paid at the end of the​ year) speaking instead of writing. Assume his cost of capital is 10.4% 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 $4.7 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