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23 April, 19:30

You are the star of a blockbuster movie. You can get paid $10,000,000 today or you can get 5.00% of the gross ticket sales for the next 10 years. You expect ticket sales to be $50,000,000 per year for the next 5 years, starting next year. If your investments earn 3% APR compounded annually, how much do you gain in PV terms by taking a percentage of gross

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  1. 23 April, 23:24
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    Gain in PV = $1,449,268

    Explanation:

    Annual % of gross ticket sales = 5% * $50,000,000

    Annual % of gross ticket sales = $2,500,000

    Present value of annuity = Annuity[1 - (1+interest rate) ^-time period]/rate

    Present value of annuity = $2,500,000[1 - (1.03) ^-5]/0.03

    PV = $2,500,000*4.579707187

    PV = $11,449,268

    Gain in PV terms = = $11,449,268-$10,000,000

    Gain in PV = $1,449,268
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