A rookie quarterback is negoti

A rookie quarterback is negotiating his first NFL contract. Hisopportunity cost is 9%. He has been offered three possible 4-yearcontracts. Payments are guaranteed, and they would be made at theend of each year. Terms of each contract are as follows:

1 2 3 4
Contract 1 $2,500,000 $2,500,000 $2,500,000 $2,500,000
Contract 2 $2,500,000 $3,500,000 $4,000,000 $5,000,000
Contract 3 $6,500,000 $1,000,000 $1,000,000 $1,000,000

As his adviser, which contract would you recommend that heaccept?

Select the correct answer.

a. Contract 1 gives the quarterback the highest present value;therefore, he should accept Contract 1.
b. Contract 1 gives the quarterback the highest future value;therefore, he should accept Contract 1.
c. Contract 3 gives the quarterback the highest future value;therefore, he should accept Contract 3.
d. Contract 2 gives the quarterback the highest present value;therefore, he should accept Contract 2.
e. Contract 3 gives the quarterback the highest present value;therefore, he should accept Contract 3.

Answer:

Solution

The best contract will be ,which will give highest total presentvalue for the cashflows

Present value=Cashflow/(1+r)^n

where

r-reqd rate of return or opportunity cost-9%

n-number od discounting periods

Calculation for total present value of 3 contracts givenbelow

Excel formula

Thus as it can be seen the Total Present value of contrat 2 ishighest so it should be selected

Thus the correct answer is

Contract 2 gives the quarterback the highest presentvalue; therefore, he should accept Contract 2.

If you are satisfied with the answer,please give athumbs up


 
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