Sarah Palin reportedly was paid an $11 million advance to write her book Going R

Question

Sarah Palin reportedly was paid an $11 million advance to write her book Going Rogue. The

book took one year to write. In the time she spent writing, Palin could have been paid to

give speeches and appear on TV news as a political commentator. Given her popularity,

assume that she could have earned $8 million over the year (paid at the end of the year) she

spent writing the book. Assume that she was unable to write the book while simultaneously

fulfilling her media commitments of appearing on TV news as a political commentator and

give speeches.

2) Assume that once her book is finished, it is expected to generate royalties of $5

million in the first year (paid at the end of the year) and these royalties are expected

to decrease by 40% per year in perpetuity. Assuming that Palin's cost of capital is 10%

and given these royalties payments, the NPV of Palin's book deal is closest to:

A) $13.00 million

B) $3.75 million

C) $12.20 million

D) $13.75 million

Explanation / Answer

Assume that once her book is finished, it is expected to generate royalties of $5 million in the first year (paid at the end of the year) and these royalties are expected to decrease by 40% per year in perpetuity. Assuming that Palin's cost of capital is 10% and given these royalties payments, the NPV of Palin's book deal is closest to:
CF0 (Adv)=-$11M, CF from Speech etc =CFs=$8M & Cf1 from Book =$5M, CF2=(1-40%)*$5M = $3M, CF3=0.6*$3M = $1.8M & so on
g = 40%, Kd=10%

D....$13.75 million

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