A famous quarterback just signed a contract for $8 million, providing $2.7 milli

Question

A famous quarterback just signed a contract for $8 million, providing $2.7 million a year for 4 years. A less famous receiver signed a contract for $7.0 million, providing $3 million now and $22 million a year for 4 years. The interest rate is 8% a. What is the PV of the quarterback's contract? (Do not round Intermedlate calculetions. Enter your answer In millions rounded to i2 declmal places.) 3 Answer is complete but not entirely correct. 24.02million b. What is the PV of the receiver's contract? (Do not round Intermedilate calculations. Enter your answer In milililons rounded to 2 decimal places.) Present l lemon? value e. Who is better paid? O Quarterback e Receiver

Explanation / Answer

a. Present Value $         0.94 Million Working: Year Cash flows Discount factor Present Value a b c=1.08^-a d=b*c 0 $ -8           1.000 $     -8.00 1 $ 2.7           0.926 $       2.50 2 $ 2.7           0.857 $       2.31 3 $ 2.7           0.794 $       2.14 4 $ 2.7           0.735 $       1.98 Total $       0.94 b. Present Value $         3.29 Million Working: Year Cash flows Discount factor Present Value a b c=1.08^-a d=b*c 0 $                 -7           1.000 $     -7.00 0 $                  3           1.000 $       3.00 1 $               2.2           0.926 $       2.04 2 $               2.2           0.857 $       1.89 3 $               2.2           0.794 $       1.75 4 $               2.2           0.735 $       1.62 Total $       3.29 c. Receiver Rceiver has higher present value.So, it is better.

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