Mary is in contract negotiations with a publishing house for her new novel. She has two options. She may be paid $100,000 up front, and receive royalties that are expected to total $26,000 at the end of each of the next five years. Alternatively, she can receive $200,000 up front and no royalties. Which of the following investment rules would indicate that she should take the former deal, given a discount rate of 8%? Rule I? Rule

Question

Quizplus · Accepted Answer

The present value of the first option is $100,000 + $26,000/(1.08) + $26,000/(1.08)^2 + $26,000/(1.08)^3 + $26,000/(1.08)^4 + $26,000/(1.08)^5 = $100,000 + $24,074.07 + $22,292.65 + $20,622.82 + $19,091.33 + $17,679.19 = $203,759.06. The present value of the second option is $200,000. Therefore, Mary should take the first option.

Mary Is in Contract Negotiations with a Publishing House for Her