Answer the questions below.
a.You are negotiating a book deal for your newest novel in which an economist single-handedly saves the world. The publisher offers to pay you an advance of $1 million today plus $500,000 at the end of each of the next three years. What is the present value of these payments, given the annual rate of discount is 5 percent? Show your work. b.You counter the publisher's offer with a counteroffer that will pay you $1.5 million today plus $5 per book sold in each of the next three years. You think you will sell 80,000 books each year in the next three years, but the publisher thinks you will only sell 40,000 books each year. Explain why both you and the publisher like this counteroffer better than the deal in part a. Show your work.
What will be an ideal response?
| a. | To simplify calculations, all returns can be converted into thousands. |
 . | |
| Hence, the present value of the total return is $2,362,000. | |
| b. | If you are right: |
 . | |
| Hence, the present value of the total return from this payoff is $2,590,000. You like this better than the offer in part a, as you get more from the publisher. | |
| If the publisher is right: | |
 . | |
| Hence, the present value of the total return from this payoff is $2,044,000 The publisher likes this better than the offer in part a as the publisher pays less to you. |
Business
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