The lead vocalist for a once popular rock band has decided to write a memoir, detailing his life and days with the band. The Vocalist signed a book deal with ABC Publishing Inc., which consisted of ABC Publishing paying the Vocalist PHP 10 million upfront, and requiring the Vocalist to finish writing his book in two years. Once the book is launched, ABC Publishing will pay the Vocalist royalties of 1 million in the first year, and are expected to decrease at a rate of 15% per year in perpetuity. All royalties are paid at the end of the year. The agent of the Vocalist is assessing the book deal contract, and determines that during the time the Vocalist is writing the book, he could have had the opportunity to do concerts with other bands. The potential earnings for these concerts are 8 million at the end of each year for 2 years. The Vocalists' cost of capital is 10%. The agent uses the Net Present Value (NPV) rule to advise the Vocalist on whether to proceed with the book deal or not. (a) Determine whether the Vocalist should accept the book deal, using the NPV rule. (b) In addition to the NPV rule, the Agent also wanted to calculate the book deal's internal rate of return (IRR) and apply the IRR rule to assess this project. Recommend whether the Agent and the Vocalist can use the IRR rule to assess this project. (c) Determine whether ABC Publishing should pursue this book deal with the Vocalist using the NPV Rule The lead vocalist for a once popular rock band has decided to write a memoir, detailing his life and days with the band. The Vocalist signed a book deal with ABC Publishing Inc., which consisted of ABC Publishing paying the Vocalist PHP 10 million upfront, and requiring the Vocalist to finish writing his book in two years. Once the book is launched, ABC Publishing will pay the Vocalist royalties of 1 million in the first year, and are expected to decrease at a rate of 15% per year in perpetuity. All royalties are paid at the end of the year. The agent of the Vocalist is assessing the book deal contract, and determines that during the time the Vocalist is writing the book, he could have had the opportunity to do concerts with other bands. The potential earnings for these concerts are 8 million at the end of each year for 2 years. The Vocalists' cost of capital is 10%. The agent uses the Net Present Value (NPV) rule to advise the Vocalist on whether to proceed with the book deal or not. (a) Determine whether the Vocalist should accept the book deal, using the NPV rule. (b) In addition to the NPV rule, the Agent also wanted to calculate the book deal's internal rate of return (IRR) and apply the IRR rule to assess this project. Recommend whether the Agent and the Vocalist can use the IRR rule to assess this project. (c) Determine whether ABC Publishing should pursue this book deal with the Vocalist using the NPV Rule
