This preview shows pages 1–6. Sign up to view the full content.
Problems
NPV for 66
NPV for 67
Problem 62
Problem 63
Problem 66
Problem 67
Problem 611
Problem 613
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document Problem 62
a.
What is the NPV of agreeing to write the book (ignoring any royalty paymen
Yea
0
1
Advance payment for book
$10,000,000.00
Annual speaking fees foregone
$8,000,000.00
Cost of capital
10.00%
NPV of book deal
($9,894,815.93)
b.
0
1
Advance payment for book
$10,000,000.00
Annual speaking fees foregone
$8,000,000.00
Royalties when book is complete
Growth rate in royalties
30.00%
declining perpetu
Cost of capital
10.00%
PV of royalties
$9,391,435.01
NPV of book deal
($503,380.92)
Problem 66
How many IRRs are there in part (a) of Problem 2? Does the IRR rule give the r
Yea
0
1
Cash flows for IRR:
$10,000,000.00
($8,000,000.00)
Bill Clinton reportedly was paid $10 million to write his book My Way
. The boo
writing, Clinton could
have been paid to make speeches. Given his popularity, a
the end of the year) speaking instead of writing. Assume his cost of capital is 10
Assume that, once the book is finished, it is expected to generate royalties of
and these royalties are expected to decrease at a rate of 30% per year in perpe
payments?
There is
1
IRR.
IRR gives the wrong answer.
Problem 67
How many IRRs are there in part (b) of Problem 2? Does the IRR rule work in th
Yea
0
1
Cash flows for IRR:
$10,000,000.00
($8,000,000.00)
There are
2
IRR's.
IRR may give the wrong answer, since there is more than one IRR.
NPV for 66
Crossing point?
Discount rate
($9,894,815.93)
0.0%
(14000000.00)
2.0%
(13071066.18)
4.0%
(12200728.27)
6.0%
(11384095.60)
8.0%
(10616775.90)
10.0%
(9894815.93)
12.0%
(9214650.15)
14.0%
(8573056.22)
16.0%
(7967116.32)
18.0%
(7394183.44)
20.0%
(6851851.85)
22.0%
(6337931.37)
24.0%
(5850424.62)
26.0%
(5387507.15)
28.0%
(4947509.77)
30.0%
(4528903.05)
32.0%
(4130283.55)
34.0%
(3750361.58)
36.0%
(3387950.34)
38.0%
(3041956.23)
40.0%
(2711370.26)
42.0%
(2395260.27)
Click here for NPV graph.
Click here for NPV graph.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document 44.0%
(2092764.06)
46.0%
(1803083.16)
48.0%
(1525477.27)
50.0%
(1259259.26)
52.0%
(1003790.64)
54.0%
(758477.48)
56.0%
(522766.74)
58.0%
(296142.90)
60.0%
(78125.00)
62.0%
131736.17 crossing point
64.0%
333860.51
66.0%
528640.91
68.0%
716445.31
70.0%
897618.56
72.0%
1072484.18
74.0%
1241345.90
76.0%
1404489.11
78.0%
1562182.17
80.0%
1714677.64
82.0%
1862213.38
84.0%
2005013.56
86.0%
2143289.61
88.0%
2277241.07
90.0%
2407056.42
92.0%
2532913.77
94.0%
2654981.58
96.0%
2773419.24
98.0%
2888377.71
1.000
ear
2
3
$8,000,000.00
$8,000,000.00
Year
2
3
4
$8,000,000.00
$8,000,000.00
$5,000,000.00
uity
PV at at year 3
$12,500,000.00
right answer in this case?
ear
2
3
($8,000,000.00)
($8,000,000.00)
ok took three years to write. In the time he spent
assume that he could earn $8 million per year (paid at
0% per year.
f $5 million in the first year (paid at the end of the year)
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview. Sign up
to
access the rest of the document.
This note was uploaded on 05/10/2011 for the course FIN 534 taught by Professor Emil during the Spring '11 term at Aberystwyth University.
 Spring '11
 Emil

Click to edit the document details