In 2011, a running back signed a contract worth $58.8 million. The contract call
ID: 2774935 • Letter: I
Question
In 2011, a running back signed a contract worth $58.8 million. The contract called for $10 million immediately and a salary of $3 million in 2011, $8.5 million in 2012, $10 million in 2013, $8.9 million in 2014 and 2015, and $9.5 million in 2016.
If the appropriate interest rate is 12 percent, what is the worth of this deal to the player? Assume all payments other than the first $10 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).)
Required:If the appropriate interest rate is 12 percent, what is the worth of this deal to the player? Assume all payments other than the first $10 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
We need to discount each and every cash flow to calculate their present value:
Year
CF
PV factor 12%
PV
0
10,000,000
1.0000
$10,000,000.00
1
3,000,000
0.8197
$2,459,016.39
2
8,500,000
0.6719
$5,710,830.42
3
10,000,000
0.5507
$5,507,068.87
4
8,900,000
0.4514
$4,017,451.88
5
8,900,000
0.3700
$3,292,993.35
6
9,500,000
0.3033
$2,881,141.72
$33,868,502.64
Hence, the present value or worth of the deal is $33,868,502.64.
Year
CF
PV factor 12%
PV
0
10,000,000
1.0000
$10,000,000.00
1
3,000,000
0.8197
$2,459,016.39
2
8,500,000
0.6719
$5,710,830.42
3
10,000,000
0.5507
$5,507,068.87
4
8,900,000
0.4514
$4,017,451.88
5
8,900,000
0.3700
$3,292,993.35
6
9,500,000
0.3033
$2,881,141.72
$33,868,502.64
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