# FIN 534 Chapter06_xlsSolsadas - Problems Problem 6-2...

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Problems NPV for 6-6 NPV for 6-7 Problem 6-2 Problem 6-3 Problem 6-6 Problem 6-7 Problem 6-11 Problem 6-13

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Problem 6-2 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 6-6 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 6-7 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 6-6 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.

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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)

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## 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.

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FIN 534 Chapter06_xlsSolsadas - Problems Problem 6-2...

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