A creative general manager has offered two different contracts to a vain quarter

Question

A creative general manager has offered two different contracts to a vain quarterback. The contracts are shown below:

The newspapers report the total dollars of the contract, so contract A will pay a total of $2,532,500.00, while contract B will pay $3,041,600.00. The player will select contract B as it has more publicity. The team can earn 8.00% on their investments, so let's determine the value of each contract.

What is the present value of contract B?

CONTACT A CONTRACT B YEAR SALARY YEAR SALARY 0 $506,500.00 0 $306,475.00 1 $506,500.00 1 $306,475.00 2 $506,500.00 2 $809,550.00 3 $506,500.00 3 $809,550.00 4 $506,500.00 4 $809,550.00

Explanation / Answer

Future value = present value * (1+r)^n

r = interest rate per period

n = number of periods

present value of contract B

= sum of present value of each cash flow

= 306475/1.08 + 306475/1.08^2 + 809550/1.08^3 + 809550/1.08^4 + 809550/1.08^5

= 2335182.5

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