An athlete signs a five-year endorsement deal with a prominent sponsor. Under this deal, the athlete will receive $5,000 each year for the first three years and $6,500 each year for the final two years. What is the present value of the total deal if the payments are discounted 6%

PV = $23,370.85

Explanation:

Giving the following information:

Cash flow (1-3) = $5,000

Cash flow (4-5) = $6,500

Discount rate = 6%

To calculate the present value, first, we need to calculate the final value:

FV = {A*[ (1+i) ^n-1]}/i

A = annual cash flow

Year 1-3:

FV = {5,000*[ (1.06^3) - 1] / 0.06

FV = 15,918

Year 4-5:

FV = {6,500*[ (1.06^2) - 1]} / 0.06

FV = 13,390

Now, the present value:

PV = FV / (1+i) ^n

PV = 15,918 / (1.06^3) = 13,365.06

PV = 13,390 / (1.06^5) = 10,005.79

PV = $23,370.85