Homework Answers
a) In determining NPV of agreeing to write the book, Bill did not get the $8.6 million per year he could have made
The present value of speaking = 8.6/1.096+8.6/1.096^2+8.6/1.096^3 = $21.538437 million
The present value of Writing = $15 million
So, NPV of writing = 15- 21.538437 = - $6.538437 million or - $6,538,437
b) The first royalty is paid at the end of 4th year = $5.4 million
growth rate of royalty per year = - 30% = -0.3
So, Value of royalty at the end of three years = Royalty at the end of 4th year / ( cost of capital - growth rate)
=5.4/(0.096- (-0.3) )
= $13.636364 million
So,value of royalties today = 13.636364/1.096^3 = $10.357785 million
So, NPV of writing the book with royalties = 15 + 10.357785 - 21.538437 = $3.819348 million or $3,819,348
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