Question

XC Quiz 2 Show all work. Label and clearly explain your answer. This is very important. 1) You must answer in order to get full credit. 2) If you do show your work, and your answer is wrong. you can still earn a substantial amount of credit depending on how serious the error is. 3) If your answer is wrong, and you don't show your work, you will get a zero. Ruth Gehrig has received contract offers from three professional aquatic b teams. The details are below. Which contract is most valuable? Salary of $500,000 per year for 7 years, starting next year Salary of $333,333 per year for 7 years, starting next year, plus a $1 million signing bonus, received immediately $350,000 per year for 3 years, starting next year. In years 4-7, the salary increases to $700,000 per year. a. b. c. The interest rate is 2% per year.

Answer 1

rate positively .. let me know if you need any clarification..

We have to compute the present value of all these three case. One with the high present value will be accepted
	i	ii	iii	iv		v=i*iv	vi=ii*iv	vii=iii*iv
						Present value computation
Year	Cash flow a	Cash flow b	Cash flow c	PVIF @ 2%		a	b	c
0		1,000,000		1.0000		-	1,000,000.00	-
1	500,000	333,333	350000	0.9804		490,196.08	326,797.06	343,137.25
2	500,000	333,333	350000	0.9612		480,584.39	320,389.27	336,409.07
3	500,000	333,333	350000	0.9423		471,161.17	314,107.13	329,812.82
4	500,000	333,333	700000	0.9238		461,922.71	307,948.17	646,691.80
5	500,000	333,333	700000	0.9057		452,865.40	301,909.97	634,011.57
6	500,000	333,333	700000	0.8880		443,985.69	295,990.16	621,579.97
7	500,000	333,333	700000	0.8706		435,280.09	290,186.44	609,392.13
	Present value					3,235,995.53	3,157,328.20	3,521,034.60
	Present value
	a	3,235,995.53
	b	3,157,328.20
	c	3,521,034.60
	We can see present value of option c is high therefore it should be preferred over other options