Hi,
Is it possible to calculate NPV with a cash flow declining in perpetuity using a financial calculator?
Here’s the question I can’t figure out that’s on this topic:
Sam is paid $10 million to write a memoir. The book took three years to write. In the time he spent writing, Sam 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?
I understand how to get a): N=1, I/Y=10, CF1=10, CF2=-8, F2=3, NPV = -9.8948 million
How do you solve b)? My book gives the answer as -503,381 but I can’t figure out how it got to that answer.
Thank you!
