John Howard reportedly was paid $400 000 to write his book Lazarus Rising. The book took three years to write. In the time he spent writing, Howard could have been paid to make speeches. Given his significance as Australias second-longest serving prime minister, assume that he could earn $300 000 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 was finished, it was expected to generate royalties of $200 000 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?