Bill Clinton reportedly was paid 102 million to write his bo

Bill Clinton reportedly was paid $10.2 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 $8.1 million a year (paid at the end of the year) speaking instead of writing. Assume his cost of capital is 9.9% per year Assume also that once the book is finished, it is expected to generate royalties of $5.24 million in the first year (paid at the end of the year) and these royalties are expected to decrease at 30% per year in perpetuity. The NPV of the book with the royalty payments is $85,000. How many IRRs are there in this problem? Does the IRR rule work in this case? Use the graph below to determine how many IRRs there are in this problem. 4.5n 3.1 0.2- 20 101 20 340 50 60708 1 20 30/ 40 50 60 70 80 1.2- Discount Rate (%) How many IRRs are there in this problem? (Select the best choice below.) O A. One IRR O B. Two IRRs O C. Three IRRs O D. Four IRRs Does the IRR rule give the right answer in this case? (Select the best choice below.) OA. No, because there are two IRRs the IRR rule cannot be used. O B. No, because the IRR is negative. ° C. Yes, because the NPV is positive. 0 D. Yes, because the higher IRR (39.1%) is greater than the cost of capital.

Solution

How many IRRs are there in this problem?

CORRECT ANSWER : B. Two IRRs

Does the IRR rule give the right answer in this case?

A. No. because there are two IRRs the IRR rule cannot be used.

WHEN THERE ARE 2 IRRs, IT IS DIFFICULT TO DETERMINE WHICH ONE IS CORRECT. SO IN THAT CASE INSTEAD OF IRR, WE USE NPV METHOD. IF NPV IS POSTITIVE, WE SHOULD GO FOR THE PROJECT.