John, governor of the USA National Bank, reportedly was paid 6million $ in advance to write his book. The book tookthree years to write. In the time he spent writing, Johncould have been paid to work as aprofessorand give speechesas an economic commentator in TV shows. Given his knowledge and experience, assume that he could have earned 8 million $per year (paid at the end of the year) working and commentinginstead of writing the book. Assume his cost of capital is 12%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?

c.How many IRRs are there in part (a)?

Does the IRR rule give the right answer in this case?

d. How many IRRs are there in part (b)?

Does the IRR rule give the right answer in this case?