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Question - John Howard reportedly was paid $390 000 to write his book Lazarus Rising. The book took three years to write. In the time he spent writing, Howard could have been paid to make speeches. Given his significance as Australia's second-longest sewing Prime Minister, assume that he could earn $280 000 per year (paid at the end of the year) speaking instead of writing. Assume his cost of capital is 9.5% per year.
Required -
a. What is the NPV of agreeing to write the book (ignoring any royalty payments)?
b. Assume that, once the book is finished, it is expected to generate royalties of $180 000 in the first year (paid at the end of the year) and these royalties are expected to decrease at a rate of 30% per year in perpetuity. What is the NPV of the book with the royalty payments?
Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest. How much control does the Fed have over this longer real rate?
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