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10 July, 13:09

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%

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  1. 10 July, 14:46
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    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
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