In 2012, a baseball player signed a contract reported to be worth $57.9 million.

Question

In 2012, a baseball player signed a contract reported to be worth $57.9 million. The contract was to be paid as $7.7 million in 2012, $9.3 million in 2013, $10.1 million in 2014, $10.2 million in 2015, $10.2 million in 2016, and $10.4 million in 2017.

If the appropriate interest rate is 9 percent, what kind of deal did the player snag? Assume all payments are paid at the end of the year.

In 2012, a baseball player signed a contract reported to be worth $57.9 million. The contract was to be paid as $7.7 million in 2012, $9.3 million in 2013, $10.1 million in 2014, $10.2 million in 2015, $10.2 million in 2016, and $10.4 million in 2017.

If the appropriate interest rate is 9 percent, what kind of deal did the player snag? Assume all payments are paid at the end of the year.

Explanation / Answer

Present worth of contract = 7.7 + 9.3/1.09 + 10.1/1.09^2 + 10.2/1.09^3 + 10.2/1.09^4 + 10.4/1.09^5= $46.60

The present value of future payments is less than $57.9. The contract is worth only $46.60

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