Ten years ago Diana Torres wrote what has become the leading Tort textbook.She has beenreceiving royalties based on revenues reported by the publisher.These revenues started at $1million in the ?rst year, and grew steadily by 5% per year.Her royalty rate is 15% of revenue.Recently, she hired an auditor who discovered that the publisher had been under reportingrevenues.The book had actually earned 10% more in revenues than had been reported onher royalty statements.
(a) Assuming the publisher pays an interest rate of 4% on missed payments, how much money does the publisher owe Diana?
(b) The publisher is short of cash, so instead of paying Diana what is owed, the publisher iso?ering to increase her royalty rate on future book sales. Assume the book will generaterevenues for an additional 20 years and that the current revenue growth will continue. IfDiana would otherwise put the money into a bank account paying interest of 3%, whatroyalty rate would make her indi?erent between accepting an increase in the futureroyalty rate and receiving the cash owed today.