Use the following information to answer the question(s)below.
Sarah Palin reportedly was paid a $11 million advance to write her book Going Rogue.The book took one year to write.In the time she spent writing,Palin could have been paid to give speeches and appear on TV news as a political commentator.Given her popularity,assume that she could have earned $8 million over the year (paid at the end of the year)she spent writing the book.
-Assume that once her 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 by 40% per year in perpetuity.Assuming that Palin's cost of capital is 10% and given these royalties payments,the NPV of Palin's book deal is closest to:
A)$3.75 million.
B)$12.20 million.
C)$13.00 million.
D)$13.75 million.

Question

Quizplus · Accepted Answer

The NPV of the book deal is calculated by considering the advance, opportunity cost, and the present value of the perpetuity of royalties. The advance is $11 million, the opportunity cost is $8 million, and the present value of the perpetuity of royalties is calculated using the formula for a perpetuity with growth: PV = C / (r - g), where C is the first year's royalty, r is the discount rate, and g is the growth rate. The first year's royalty is $5 million, the discount rate is 10%, and the growth rate is -40%. The NPV is $11 million - $8 million + PV of royalties, which is closest to $13.75 million.

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