Bill Clinton reportedly was paid $15.0 million to write his book My Life. The book took...
Bill Clinton reportedly was paid $15.0 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 $8.9 million per year (paid at the end of the year) speaking instead of writing. Assume his cost of capital is 10.4%per year.
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 $5.1
million in the first year (paid at the end of the year) and these royalties are expected to decrease at a rate of 30%
per year in perpetuity. What is the NPV of the book with the royalty payments?
Homework Answers
NPV = Present value of cash inflows - Present value of cash outflows
= 15 million - 8.9 million*PVAF(10.4%, 3 years)
= 15 million - 8.9 million*2.4694
= -$6.9777 million
b.Present value of royalty payments after 3 years = 5.1 million/(10.4%+30%)
= $12.6238 million
Present value today = 12.6238 million*PVF(10.4%, 3 years)
= 9.3817 million
Hence, NPV = -6.9777 + 9.3817
= $2.404 million
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Bill Clinton reportedly was paid $15.0 million to write his book
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