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?

 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.

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

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

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