A best-selling author decides to cash in on her latest novel by selling the righ

Question

A best-selling author decides to cash in on her latest novel by selling the rights to the book

A best-selling author decides to cash in on her latest novel by selling the rights to the book's royalties for the next six years to an investor. Royalty payments arrive once per year, starting one year from now. In the first year, the author expects $400,000 in royalties, followed by $300,000, then $100,000, then $10,000 in the three subsequent years. If the investor purchasing the rights to royalties requires a return of 7% per year, what should the investor pay?

Explanation / Answer

Year Royalty Payment (1)--------------- Discounting Factor (2) --------------------Present Value (1X2)

400,000 ---------------------------------------0.9346----------------------------------------------------- 373,832
300,000 ---------------------------------------0.8734 ----------------------------------------------------- 262,032

100,000---------------------------------------0.8163-----------------------------------------------------  81,630

10,000---------------------------------------0.7629 ----------------------------------------------------- 7,629

10,000 ---------------------------------------0.7130 ----------------------------------------------------- 7,130

10,000 ---------------------------------------0.6663 ----------------------------------------------------- 6,663

----------------------------------------------------- total present Value(summing) 738,915

Discounting factor=1/(1+rate%/100)^n

here, the discounting factor is calculated as 1/1.07^n where n is the time period.

for first year discounting factor=1/1.07=0.9345

Present value=discounting factor*yearly payment

Present value for 1st yr=400,000*0.9345= 373,832

similarly do for all payments.

After adding all PVs,
The investor should pay $738,915

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.