Mr. Smith received two endorsement offers – Under Armour offers $50,000 to be pa

Question

Mr. Smith received two endorsement offers – Under Armour offers $50,000 to be paid in 5 years and Nike negotiated a long-term deal that called for yearly payments to Mr. Smith of $8,500 for 3 years. The risk of default with the Under Armour is higher, so a discount rate of 9% is applied as opposed to the 5% rate used for Nike. Which is the better investment opportunity? (Fill in the blank in order)

Present value of Under Armour is: _________________________________________
Present value of Nike is: _________________________________________________
The difference between two is: ____________________________________________
The better deal between two is: ____________________________________________

Explanation / Answer

Armour Offer Year Cash flow Discount factor 9% Discounted cash flow 1 0 0.9174 0.00 1 0 0.8417 0.00 1 0 0.7722 0.00 1 0 0.7084 0.00 1 50000 0.6499 32496.57 32496.57 Nike Offer Year Cash flow Discount factor 5 % Discounted cash flow 1 8500 0.9524 8095.24 1 8500 0.9070 7709.75 1 8500 0.9524 8095.24 1 8500 0.9524 8095.24 1 8500 0.9524 8095.24 Present Value 40090.70 Present value of Under Armour is 32496.56931 Present value of Nike is 40090.7 The difference between two is 7594.130685 The better deal between two is Nike Offer

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