You have been asked to help your classmate, who was just offered a professional

Question

You have been asked to help your classmate, who was just offered a professional volleyball contract, with selecting her choice of contract offers. The first offer pays her $1 million dollars as a signing bonus and $150,000 for the next three years. The second offer pays her $500,000 as a signing bonus and provides an additional $500,000 for the next two years. The current market rate for contracts of this type is 9%. Which contract is better (25points)? By how much (25 points)? Note: to find the answer to this problem, compute the present value for each contract then find the dollar difference. Hint: find the pv factor and multiply by the future contract payments then add the signing bonus to find the present value of the contract.

Explanation / Answer

For contract 1 , Y = $ 1 million , A = $0.15 million , n = 3 years For contract 2 , Y = $ 0.5 million , A = $ 0.5 million , n = 2 years i = 0.09 ( for both ) Using , NPV ( net present value ) = Y + S ( A / ( 1+i) ^r ) r varies from 1 to n For contract 1 , (NPV)1 = $ 1.451 million For contract 2 , (NPV)2 = $ 1.458 million Since (NPV)2 > (NPV)1 therefore , contract 2 is better

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