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Bill Clinton reportedly was paid 10 million to write his book My Life. The book took three years to write. In the time he spent

Bill Clinton reportedly was paid 10 million to write his book My Life. 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)? What should Clinton do if he follows the NPV rule?

b. Can we use IRR rule to help Clinton to make the decision? Why?

c. Assume that, once the book was finished, it was expected to generate royalties of 5 million in the first year (paid at the end of the year) and these royalties were expected to decrease at a rate of 30% per year in perpetuity. What is the NPV of the book with the royalty payments?

d. Can we use IRR rule to help Clinton to make the decision? Why?

2. A company buys a color printer that will cost $18,000 to buy, and last 5 years. It is assumed that it will require servicing costing $500 each year. What is the equivalent annual annuity of this deal, given a cost of capital of 12%?

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