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Q3 A. (20 Marks) Present Values. A famous quarterback just signed a $15 million contract providing $3 million a year for 5 ye

Q3 A. (20 Marks) Present Values. A famous quarterback just signed a $15 million contract providing $3 million a year for 5 years. A less famous receiver signed a $14 million 5-year contract providing $4 million now and $2 million a year for 5 years. Who is better paid? The interest rate is 12 percent

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Answer #1
Famous Quarterback
Year Cash flow Pv Factor @12% Present value $
1       3,000,000 0.89286               2,678,571
2       3,000,000 0.79719               2,391,582
3       3,000,000 0.71178               2,135,341
4       3,000,000 0.63552               1,906,554
5       3,000,000 0.56743               1,702,281
Total 15,000,000           10,814,329
Present Value $ 10,814,329
Less Famous
Year Cash flow Pv Factor @12% Present value $
0       4,000,000 1               4,000,000
1       2,000,000 0.89286               1,785,714
2       2,000,000 0.79719               1,594,388
3       2,000,000 0.71178               1,423,560
4       2,000,000 0.63552               1,271,036
5       2,000,000 0.56743               1,134,854
Total 14,000,000           11,209,552
Present Value $ 11,209,552
Less famous is better because its present value is more than the famous quarterback.
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