Bill Clinton reportedly was paid $9.0 million to write his book My Life. The book took three years to write. In thetime he spent writing, Clinton could have been paid to make speeches. Given his popularity, assume that he couldearn $8.9million per year (paid at the end of the year) speaking instead of writing. Assume his cost of capital is 9.8% peryear.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 $4.7 million in the first year (paidat the end of the year) and these royalties are expected to decrease at a rate of 30% per year in perpetuity. Whatis the NPV ofthe book with the royalty payments?a. What is the NPV of agreeing to write the book (ignoring any royalty payments)?The NPV of agreeing to write the book (ignoring any royalty payments) is §. (Round to the nearest dollar.)

Part (a): NPV of Agreeing to Write the Book (Ignoring Royalty Payments) 1.Calculate the opportunity…

Answered: Bill Clinton reportedly was paid $9.0…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Bill Clinton reportedly was paid $10.5 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 $8.4 million per year (paid at the end of the year) speaking instead of writing. If his cost of capital is 9.9% per year, then the NPV of agreeing to write the book (ignoring any royalty payments) is $10,426,388. How many IRRs are there in this problem? Does the IRR rule give the right answer in this case? (Note: Consider the upfront payment as a positive cash flow and the opportunity cost of missed speaking fees as negative cash flows.) The IRR is %. (Round to two decimal places.)
Laura wants to buy a delivery truck. The truck costs $76,000 , and will allow her to increase her after tax profits by $14,000 per year for the next 10 years. She will borrow 82% of the cost of the truck for 10 years, at an interest rate of 6%. Laura’s unlevered cost of capital is 17% and her tax rate is 21%. The loan includes a $2,000 application fee. What is the NPV of buying the truck on these terms? Please use the APV method.
Professor Wendy Smith has been offered the following opportunity: A law firm would like to retain her for an upfront payment of $49,000. In return, for the next year the firm would have access to eight hours of her time every month. As an alternative payment arrangement, the firm would pay Professor Smith's hourly rate for the eight hours each month. Smith's rate is $550 per hour and her opportunity cost of capital is 16% per year. What does the IRR rule advise regarding the payment arrangement? (Hint: Find the monthly rate that will yield an effective annual rate of 16%.) What about the NPV rule? The annual IRR is ☐ %. (Round to two decimal places.)
Laura wants to buy a delivery truck. The truck costs $59,000, and will allow her to increase her after tax profits by $33,000 per year for the next 10 years. She will borrow 98% of the cost of the truck for 10 years, at an interest rate of 6%. Laura's unlevered cost of capital is 11% and her tax rate is 39%. The loan includes a $2,000 application fee. What is the NPV of buying the truck on these terms? Please use the APV method.
(b) Samuel Gumede earns £39,000 a year working for a building company as a project manager. He is considering the possibility of leaving the company and starting his own business. To do this, he will have to use all his £60,000 savings that are currently invested at an interest rate of 2%. He estimates that the annual profit from his own business will be £50,000. Other relevant costs in starting his own business amount to £1,750. Required: Using the information above, calculate the net relevant benefit of Samuel starting his own business.
Laura wants to buy a delivery truck. The truck costs $124,000 , and will allow her to increase her after tax profits by $18,000 per year for the next 10 years. She will borrow 92% of the cost of the truck for 10 years, at an interest rate of 6%. Laura’s unlevered cost of capital is 12% and her tax rate is 35%. The loan includes a $2,000 application fee. What is the NPV of buying the truck on these terms? Please use the APV method.
Bill Williams has the opportunity to invest in project A that costs $6,900today and promises to pay $2,100, $2,400, $2,400, $2,000 and $1,800over the next 5 years. Or, Bill can invest $6,900 in project B that promises to pay $1,500, $1,500, $1,500, $3,600 and $4,000 over the next 5 years. (Hint: For mixed stream cash inflows, calculate cumulative cash inflows on a year-to-year basis until the initial investment is recovered.) a. How long will it take for Bill to recoup his initial investment in project A? b. How long will it take for Bill to recoup his initial investment in project B? c. Using the payback period, which project should Bill choose? d. Do you see any problems with his choice?
Sarah Palin reportedly was paid a $11 million advance to write her book Going Rogue. The book took one year to write. In the time she spent writing, Palin could have been paid to give speeches and appear on TV news as a political commentator. Given her popularity, assume that she could have earned $8 million over the year (paid at the end of the year) she spent writing the book. Assume that once her 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 by 40% per year in perpetuity. Assuming that Palin's cost of capital is 10% and given these royalties payments, the NPV of Palin's book deal is closest to:
You own a restaurant and are considering buying a liquor license. You estimate that it will cost you $200,000 to buy a five-year license and construct a bar, and that you will generate $40,000 in after-tax cash flows each year for the next five years. (The cost of the license is capitalized and the cash flows already reflect the depreciation). If your cost of capital is 15%, estimate the net present value of buying a liquor license. (There is no salvage value at the end of the 5 year). ( z a li). ".(
Professor Wendy Smith has been offered the following opportunity: A law firm would like to retain her for an upfront payment of $50,000. In return, for the next year the firm would have access to eight hours of her time every month. As an alternative payment arrangement, the firm would pay Professor Smith's hourly rate for the eight hours each month. Smith's rate is $540 per hour and her opportunity cost of capital is 16% per year. What does the IRR rule advise regarding the payment arrangement? (Hint: Find the monthly rate that will yield an effective annual rate of 16%.) What about the NPV rule? The annual IRR is %. (Round to two decimal places.)
Brian owns a tanning salon that is expected to produce annual cash flows forever. The tanning salon is worth $636,600.00 and the cost of capital is 6.40%. Annual cash flows are expected with the first one due in one year and all subsequent ones growing annually by 2.30%. What is amount of the annual cash flow produced by the tanning salon in 1 year expected to be? O $55,384.20 (plus or minus $10) O $26,100.60 (plus or minus $10) O $155,268.29 (plus or minus $10) O $15,526,829.27 (plus or minus $10)
Professor Wendy Smith has been offered the following opportunity: A law firm would like to retain her for an upfront payment of $49,000. In return, for the next year the firm would have access to eight hours of her time every month. As an alternative payment arrangement, the firm would pay Professor Smith's hourly rate for the eight hours each month. Smith's rate is $550 per hour and her opportunity cost of capital is 16% per year. What does the IRR rule advise regarding the payment arrangement? (Hint: Find the monthly rate that will yield an effective annual rate of 16%.) What about the NPV rule? The annual IRR is 14.96 %. (Round to two decimal places.) The IRR rule advises: (Select the best choice below.) A. Since the IRR is less than the cost of capital, 16%, Smith should turn down this opportunity. OB. With an IRR of 16% and with Smith's cost of capital at 14.96%, according to the IRR rule, she should reject this opportunity. C. Since the IRR is less than the cost of capital, 16%,…

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