1. Calculate the present value in each of the following cases. Show your work. a

Question

1. Calculate the present value in each of the following cases. Show your work. a. You are negotiating a book deal for your newest novel in which an economist singlehandedly saves the world. The publisher offers to pay you an advance of $1 million today plus $500,000 at the end of each of the next three years. What is the present value of these payments, given your rate of discount of 5 percent? b. You counter the publishers offer with a counter-offer that will pay you $1.5 million today plus $5 per book sold in each of the next three years. You think you will sell 80,000 books each year in that period, but the publisher thinks you will only sell 40,000 books each year. Explain why both you and the publisher like this offer better than the deal in part a.

Explanation / Answer

a) 1+(.5/1.05)+(.5/1.05^2)+(.5/1.05^3) = $2,361,624.02

b) according to me, Profit from book sell each year = 5*80,000 = 400,000 = .4mn

  according to Publisher, Profit from book sell each year = 5*40,000 = 200,000 = .2mn

PV , according to me, = 1.5+(.4/1.05)+(.4/1.05^2)+(.4/1.05^3) = $2,589,299.21

PV, acc to publisher = 1.5+(.2/1.05)+(.2/1.05^2)+(.2/1.05^3) = $2044649.60

both of us like the second offer because, ithink i ll get more than the previous amount, and publisher think he has to pay less rthan the previous

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