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.
-Assuming that Palin's cost of capital is 10%,then the NPV of her book deal is closest to:
A)$2.00 million.
B)$2.20 million.
C)$3.00 million.
D)$3.73 million.

Question

Quizplus · Accepted Answer

To calculate NPV, we need to discount all future cash flows to the present value. In this case, the cash flows are the $11 million advance and the $8 million opportunity cost of not accepting speaking engagements and appearing on TV news. Assuming a cost of capital of 10%, we can calculate the present value of those cash flows as follows:

PV of Advance = $11 million / (1 + 0.10)^1 = $10 million
PV of Opportunity Cost = -$8 million / (1 + 0.10)^1 = -$7.27 million (note that we use a negative sign because this represents a cost, not a revenue)

So the total NPV of the book deal is:
NPV = $10 million - $7.27 million = $2.73 million

Therefore, the closest answer is D) $3.73 million, which is the closest to the calculated NPV.

Use the Following Information to Answer the Question(s)below