LeBron Curry is the hottest NBA Draft prospect ever! After spending just one yea
ID: 2728717 • Letter: L
Question
LeBron Curry is the hottest NBA Draft prospect ever! After spending just one year in college he decided to announce his intention of entering the draft and foregoing his final three years of college. He retained an agent and based on preliminary assessments of his value he believes he can negotiate a five contract worth $100 million based on certain performance guarantees. Of the $100 million contract value Mr. Curry knows he can get some of it as a signing bonus. Having heard stories of others NBA stars who end up penniless after earning hundreds of millions of dollars, and aware that an injury can quickly derail his career, Mr. Curry wants to figure out how much of the $100 million contract he should demand as a signing bonus to provide for a decent lifestyle for himself and family once he has one. In other words, Mr. Curry wants to know how much money he would need now to fund the expenses he will incur over the rest of his life given how he plans to live. This is what he knows: During the first 5 years of his career he expects to have monthly cash living costs of $12,000.00. After that, he expects to marry and start a family. His monthly cash expenses will increase to $27,000.00. How much should Mr. Curry ask for as a signing bonus if he wants it to cover his monthly cash expenses until he is 39 years old? He is currently 19 and believes he can earn 10% on investments. Mr. Curry's good friend majored in business and offered him an investment opportunity. If Mr. Curry invests $1.2 million now his friend can pay him the following: period 1=$75,000; period 2=$75,000; period 3=$250,000. You hear this and immediately tell Mr. Curry not to invest. How did you know it was a worthwhile investment without even calculating its NPV? Mr. Curry's sister has a business idea she wants him to invest in. For an initial investment of $2.5 million the concept will return the following: period 1=$550,000; period 2=$275,000; period 3=$575,000; period 4=$750,000; period 5=$550,000; period 6=$550,000; period 7=$675,000; period 8=$775,000; period 9=$850,000; period 10=$1,550,000. Should Mr. Curry make the investment? Why? What is this investment's profitability index? Mr. Curry will retire when he is 39 years old. He expects to live until 90. How much will he need to invest at age 39 to fund his annual living expenses of $350,000 until he reaches 90? What is that worth in today's dollars?Explanation / Answer
Signing Bonus Amount to meet his expenses until he aged 39 =
in first five years per year expenses is 144000
in another 15 years per year expenses is 324000
Net present value of 20 years cash outflow is = {Net Period Cash Flow/(1+R)^T}
= 2.076 Million
Rate of Interest considered - 10%
Investment of 1.2 Million
The total inflow in five years will only be - 1.025 Million which is less than total investment of 1.20 Million hence its not a profitable investement and even no need to calculate NPV
Invetsment in his sister business -
Initial Investment - 2.50 Million
Present value of 10 years cash inflow = 3.626 Million
Net Cash profit = 3.626 - 2.500 = 1.126 Million
Profit % = (profit * 100)/intitial investment
= (1.126*100)/2.50
= 45.04%
Hence he must invest in this business
Investment required at the age of 39 to meet expenses per year $ 350000 till 90 years
Net Present value of Cash outflow $ 350000 for next 51 years =
3.47 Million
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