1. Bill Clinton reportedly was paid $10 million to write his book My Way. 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)?;(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?;1|Page;2. You are thinking of retiring. Your retirement plan will pay you either $250,000 immediately;on retirement or $350,000 five years after the date of your retirement. Which alternative;should you choose if the interest rate is;(a) 0% per year?;(b) 8% per year?;(c) 20% per year?;2|Page;3. Your great aunt Matilda put some money in an account for you on the day you were born.;This account pays 8% interest per year. On your 21st birthday the account balance was;$5,033.83.;(a) What was the amount of money that your great aunt Matilda originally put into;the account?;(b) If you left the money in your account until your 65th birthday how much money;would you have?;(c) If the account paid 5% interest per year instead of 8% interest per year how;much money would your aunt Matilda have had to originally put into the account for you;to still have $5,033.83 on your 21st birthday.;(d) If you leave the money in your account (from part c) until your 65th birthday;how much money would you have?;3|Page;4. Consider the following cash flows;0;1;$600;2;$1,200;3;$1,800;(a) At an annual interest rate of 7%, what is the future value of this timeline in year 3?;(b) At an annual interest rate of 7%, what is the present value of this timeline in year 0?;(c) At an annual interest rate of 7%, what is the future value of this timeline in year 2?;4|Page;5. Suppose that a young couple has just had their first baby and they wish to ensure that enough;money will be available to pay for their childs college education. Currently, college tuition;books, fees, and other costs, average $12,500 per year. On average, tuition and other costs;have historically increased at a rate of 4% per year.;(a) Assuming that costs continue to increase an average of 4% per year, what will;tuition and other costs for one year for this student in 18 years when she enters college?;(b) Assuming that college costs continue to increase an average of 4% per year and;that all her college savings are invested in an account paying 7% interest, what is the;amount of money she will need to have available at age 18 to pay for all four years of her;undergraduate education?;(c) The couple decides to make deposits into an educational savings account on each;of their daughters birthdays, starting with her first birthday. Assume that the educational;savings account will return a constant 7%. The parents deposit $2000 on their daughters;first birthday and plan to increase the size of their deposits by 5% each year. Assuming;that the parents have already made the deposit for their daughters 18th birthday, then;what is the amount available for the daughters college expenses on her 18th birthday?
Paper#30716 | Written in 18-Jul-2015Price : $37