8 of 9 (7 complete) This Test: 20 pts possible This Question: 3 pts Bill Clinton

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8 of 9 (7 complete) This Test: 20 pts possible This Question: 3 pts Bill Clinton reportedly was paid $10.0 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 $80 m on peryear paid at the end oft eyer) speaking instead of writing. Assume his cost of capital is t00% per year a. What is the NPV of agreeing to write the book (ignoring any royalty payments)? the book s finished it is expected to generate royalties o S5 0 million in the first year( pa at the end o the year and these royates are expected to decrease a a rate of 30% per year in pepeuty whats 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 writo the book (gnoring any royality payments) is (Round to the nearest dollar) b. Assume that, once the book is finished, it is expected to generate royaltes of $5.0 milion in the first year (paid at NPV of the book with the royalty payments? the end of the year) and these royalties are expected to decrease at a rate of 30% per year in perpetuity. What is the The NPV of the book with the royalty payments is $1 (Round to the nearest dollar.) Enter your answer in each of the answer boxes.

Explanation / Answer

a.] NPV of writing the book [forgoing the annual speaking fees] = Present value of cash inlfow - present value of cash outflow

   = $8000000 * [PVAF(10%,3 years)] - $10000000

= $8000000 * 2.4869 - $10000000

= $19895200 - $10000000

= ($9895200)

Note:- Clinton could have been paid to make speeches, that means he let the speaking fees forgo by choosing to writing the book, Therefore NPV of writing the book is calculated for forgoing the annual speaking fees

b.]    NPV with the royalties = Present value of royalties + NPV of writing the book

   = $9391250 + ($9895200)

      = $9391250 - $9895200

= $503950

Note:-    Present value of royalties with declining perpetuity = Intital royalty at end of 1st year / (cost of capital - growth rate)

   = $5000000 / [10% - (30%)]

= $5000000 / [10% + 30%]

= $5000000 / 40%

= $12500000

Present value of royalty after 3 years = $12500000 * PVF(10%,3 years)

= $12500000 * 0.7513

= $9391250

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