In 2011, a running back signed a contract worth $65.7 million. The contract call

Question

In 2011, a running back signed a contract worth $65.7 million. The contract called for $11 million immediately and a salary of $3.7 million in 2011, $9.9 million in 2012, $11 million in 2013, $9.6 million in 2014 and 2015, and $10.9 million in 2016. Required: If the appropriate interest rate is 7 percent, what kind of deal did the running back scamper off with? Assume all payments other than the first $11 million are paid at the end of the year. (Enter rounded answer as directed, but do not use rounded numbers in intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567). Round your answer to 2 decimal places (e.g., 32.16).)

Explanation / Answer

Yr Amount ($ M) D.Factor (7%) PV($ M)

2011 3.7 0.9346 3.458

2012 9.9 0.8734 8.647

2013 11 0. 8163 8.9793

2014 9.6 0. 7629 7.324

2015 9.6 0.7130 6.845
2016 10.9 0.6663 6.66

Present Value Total $ 41.913

Hence, the Total present Value = $ 11 + $ 41.913

= $ 52.913

Value of the Contract = $ 65.7 million

The type of deal the running back scamper off with is the one where the Total Present Value of the Contract is Lower than the Value of the Contract.

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