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23 September, 22:15

A rookie quarterback is negotiating his first NFL contract. His opportunity cost is 10%. He has been offered three possible 4-year contracts. Payments are guaranteed, and they would be made at the end of each year. Terms of each contract are as follows: 1 2 3 4 Contract 1 $3,000,000 $3,000,000 $3,000,000 $3,000,000 Contract 2 $2,500,000 $3,000,000 $4,000,000 $5,000,000 Contract 3 $7,000,000 $1,500,000 $1,500,000 $1,500,000 As his advisor, which contract would you recommend that he accept?

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  1. 23 September, 22:23
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    Contract 3 has the higher present value. Therefore, it is the most convinient.

    Explanation:

    Giving the following information:

    His opportunity cost is 10%.

    Contract 1

    $3,000,000

    $3,000,000

    $3,000,000

    $3,000,000

    Contract 2

    $2,500,000

    $3,000,000

    $4,000,000

    $5,000,000

    Contract 3

    $7,000,000

    $1,500,000

    $1,500,000

    $1,500,000

    We need to find the present value of each contract to compare.

    PV = CF / (1+i) ^

    CF = cash flow

    Contract 1:

    PV = 3,000,000 / (1.10) + 3,000,000 / (1.10^2) + 3,000,000 / (1.10^3) + 3,000,000 / (1.10^4)

    PV = $9,509,596.34

    Contract 2:

    PV = $11,172,392.6

    Contract 3:

    PV = $9,754,798.17
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