7. In 2005, soccer player David Beckham signed a contract reported to be worth $
ID: 2653800 • Letter: 7
Question
7. In 2005, soccer player David Beckham signed a contract reported to be worth $51 million. The contract called for $2 million immediately and $10 million in 2006. The remaining $39 million was to be paid as $9 million in 2007, $7 million in 2008, $6 million in 2009, $5 million in 2010, $4 million in 2011 and in 2012, $2 million in 2013, and $1 million in 2014 and 2015. Assuming all the payments, except the first $2 million are paid at the end of each year and the discount rate is 9%, what kind of deal did the soccer player snag?
Year 1 2 3 4
Cash Flow $600 –$600 $600 –$600
9. What is the future value of the set of cash flows (from the information above) 4 years from now? Assume an interest rate of 10%.
10. Starting today, George is going to contribute $300 on the first of each month to his retirement account. His employer will contribute an additional 50% of the amount George contributes. If both George and his employer continue to do this and he can earn a monthly rate of .68%, how much will George have in his retirement account 35 years from now?
Explanation / Answer
Present values, based on 9% discounting factor, of all the future cash flows should be considered for the deal.
Year
Cash inflow (a)
Discounting factor at 9%
1 / (1 + 0.9) ^year
Present value [a × discounting factor]
2005
$2 million
1
$2 million
2006
$10 million
0.9174
$9.174 million
2007
$9 million
0.8417
$7.5753 million
2008
$7 million
0.7722
$5.4054 million
2009
$6 million
0.7084
$4.2504 million
2010
$5 million
0.6499
$3.2495 million
2011
$4 million
0.5963
$2.3852 million
2012
$4 million
0.5470
$2.188 million
2013
$2 million
0.5019
$1.0038 million
2014
$1 million
0.4604
$0.4604 million
2015
$1 million
0.4224
$0.4224 million
Total
$38.1144 million
The deal of $51 million has the present value $38.1144 million.
Year
Cash inflow (a)
Discounting factor at 9%
1 / (1 + 0.9) ^year
Present value [a × discounting factor]
2005
$2 million
1
$2 million
2006
$10 million
0.9174
$9.174 million
2007
$9 million
0.8417
$7.5753 million
2008
$7 million
0.7722
$5.4054 million
2009
$6 million
0.7084
$4.2504 million
2010
$5 million
0.6499
$3.2495 million
2011
$4 million
0.5963
$2.3852 million
2012
$4 million
0.5470
$2.188 million
2013
$2 million
0.5019
$1.0038 million
2014
$1 million
0.4604
$0.4604 million
2015
$1 million
0.4224
$0.4224 million
Total
$38.1144 million
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.