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Posted: February 21st, 2022
Please give the completely work on Sunday, Feb 13th, before 12Pm with Chicago timezone.
Please give the completely work on Sunday, Feb 13th, before 12Pm with Chicago timezone.
Q.1 Bill Clinton reportedly was paid $15 million to write his book My Way. 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 million per year (paid at the end of the year) speaking instead of writing. Assume his cost of capital is 10% 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 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?
Q2 What’s the IRR in part (a) of Problem 1? Does the IRR rule give the right answer in this case?
Timeline:
0
1
2
3
15
–8
–8
–8
Q3. You are considering making a movie. The movie is expected to cost $10 million upfront and take a year to make. After that, it is expected to make $5 million when it is released in one year and $2 million per year for the following four years. What is the payback period of this investment? If you require a payback period of two years, will you make the movie? Does the movie have a positive NPV if the cost of capital is 10%?
Timeline:
0 1 2 3 4 5 6
–10 0 5 2 2 2 2
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