Bill Clinton reportedly was paid $12 million to write his book My Life. The book
ID: 2812654 • Letter: B
Question
Bill Clinton reportedly was paid $12 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 eam $8.00 million per year (paid at the end of the year) speaking instead of writing. Assume his cost of capital is 10.0% per year a. Based on the above cash flows, how many IRRs does the opportunity have? Does the IRR rule give the right answer in this case? b. Assume now that once the book is finished, it is expected to generate royalties of $5.00 million in the first year (paid at the end of the year) and these royalties are expected to decrease at 30% per year in perpetuity How many IRRs are there in this case? Does the IRR rule work in this case?Explanation / Answer
1.
IRR:
12-8/(1+IRR)-8/(1+IRR)^2-8/(1+IRR)^3=0
=>IRR=44.63%
There is only 1 IRR
Yes, IRR gives right answer
2.
12-8/IRR+5/((IRR+30%)*(1+IRR)^3)=0
IRR=59.8746405614145%
Yes, IRR rule works here
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