5. Bill Clinton reportedly was paid $15 million to write his book My Life. Suppose 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?

1. The timeline of Clintons investment opportunity is

0	1	2	3	Years
$15,000,000	-$8,000,000	-$8,000,000	-$8,000,000	CF

The NPV of Clintons investment opportunity is

NPV = 15,000,000 8,000,000/(1+r) 8,000,000/(1+r)² 8,000,000/(1+r)³

By setting the NPV equal to zero and solving for r, we find the IRR. Using the annuity spreadsheet:

NPER	3
Rate	28%
PV	$15,000,000
PMT	-$8,000,000
FV	$0

The 28% IRR is larger than the 10% opportunity cost of capital. According to the IRR rule, Clinton should sign the deal. But what does the NPV rule say?

NPV = 15,000,000 (8,000,000 / 1.10) (8,000,000 / 1.10²) (8,000,000 / 1.10³) = -$4,894,816

At a 10% discount rate, the NPV is negative, so signing the deal would reduce Clintons wealth. He should not agree to write the book.

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Can you please let me know if my answer to question a is correct?

Also, how would you go about solving b?