5. Greg McBrown has just signed a four year contract to play for a professional

Question

5. Greg McBrown has just signed a four year contract to play for a professional ice hockey team. He will receive $2.5M this year, $3.5M next year, $3.7M in the third year, and $4.0M for the final year. Assume all payments are made at the end of each year (a) what is the present value of his contract if his discount rate is 4.5% EAR? (b) If he wanted instead to receive equal monthly payments at the beginning of each month, with the first Cheque today, how much would the monthly cheque be? Assume all interest rates are 4.5% EAR

Explanation / Answer

Solution: Discounting Factor @4.5% Future Value Present Value End of Year 1 0.956937799 $2.5M 2.392344498 M (Present Value = Discounting Factor * Future Value) End of Year 2 0.915729951 $3.5M 3.205054829 M (Present Value = Discounting Factor * Future Value) End of Year 3 0.876296604 $3.7M 3.242297435 M (Present Value = Discounting Factor * Future Value) End of Year 4 0.838561344 $4M 3.354245374 M (Present Value = Discounting Factor * Future Value) 13.7 12.19394214 M Calculation of Discounting Factor Working 1/1.045^1 1/1.045^2 1/1.045^3 1/1.045^4 Using the PMT function in excel we Can calculate monthly cheque to be received NPER 4*12 48 Monthly Rate 4.5%/12 0.375 Total fees (2.5+3.5+3.7+4) 13.7 13.7M Using PMT Funstion in Excel Sine monthly Payment at the Beginning of the month Type would be 1 PMT(0.375%,48,,13.7,1) = Monthly Payments = $0.26M

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