If a teacher decides to sell hs own textbook. It will retail at $275 for a new b

Question

If a teacher decides to sell hs own textbook. It will retail at $275 for a new book, and he will receive a 45% royalty for each book sold. However, he will have to pay the publisher an upfront one-time book processing charge of $37,000. If the teacher looks into the e-book option, students will pay a subscription of $15/month to access the book online for 4 months, and the teacher will receive 76.2% of the subscription fee. However, he will pay a much smaller book processing charge of $10,000. If the class is taught three times a year, all 175 students in the class buy (get access to) the book, and the teacher plans to use the book for 8 years, which option has a better financial net present value for the teacher. Use a discount rate of 12% compounded annually.

Explanation / Answer

Option 1 under Printing Book

Retail price per Book = $275

Royalty =45 %

No of Student=175

Amount of sale of books= $ 275*175= $ 48142

Amount of Royalty= $ 48142*45%= $ 21656.25

NPV (Net Present Value)= Present value(PV) of inflow- PV of Out flow

                PV of inflow= amount* discout factor

Discount factor= 1/(1+r)^t

Where,

r= Discount rate

t= no of year

NPV= Amount of Royalty* Sum of discount factor for 8 year-Out flow

            = $ 21656.25*4.963( Refer Working Note-1) -$37000=$ 70,480.71

Under Option -II Under E book

Subcription charges = $ 15*4*3*175=$31500

Royalty= $31500*76.2%= $ 24003

NPV= Royalty * sum of Discount factor for 8 year - pv of out flow

         = $ 24003*4.963( Working Note-1)-10000= $ 109126.88

Option II is better Since it has more NPV than option 1.

Working Note -1 discount factor

Year 1= 1/(1+0.12)^1= 0.892

Year 2 = 1/(1+0.12)^2=0.797

Year 3= 1/(1+0.12)^3= 0.711

Year 4 = 1/(1+0.12)^4= 0.635

Year 5= 1/(1+0.12)^5=0.567

Year 6= 1/(1+0.12)^6= 0.506

Year 7=1/(1+0.12)^7= 0.452

Year 8= 1/(1+0.12)^8= 0.403

Total Discout factor       4.963

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