Chapter 6
Investment Decision Rules
6-2.Bill Clinton reportedly was paid $10 million to write his book My Way. The book tookthree years to write. In the time he spent writing, Clinton could have been paid to makespeeches. Given his popularity, assume that he could earn $8 million per year (paid atthe end of the year) speaking instead of writing. Assume his cost of capital is 10% peryear.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 $5million in the first year (paid at the end of the year) and these royalties are expectedto decrease at a rate of 30% per year in perpetuity. What is the NPV of the bookwith the royalty payments?
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- Winter '16
- Net Present Value, AOL, positive NPV
