A best selling author decides to cash in on her latest novel

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?

Solution

Investor should Pay for the first year

First Year -> $400,000/1.07 = $373,831.775

Second Year -> $300,000/(1.07)^2 = $262,031.618

Third Year -> $100,000/(1.07)^3 = $81,629.79

Fourth Year ->$100,00/(1.07)^4 = $7628.95

Fifth Year ->$100,00/(1.07)^5 = $7129.96

Sixth Year ->$100,00/(1.07)^6 = $6663.43

Final Amount the investor should pay is equal to sum of all the above amounts

=> $373,831.775 + $262,031.618 + $81,629.79 + $7628.95 + $7129.96 + $6663.43

=> $ 738,915.57