Question

A first round draft choice quarterback has been signed to a 3 year, $25 million dollar contract. The details provided for an immediate cash bonus of $2 million. The player is to receive a $5 million in salary at the end for the first year, $8 million the next, and $10 million at the end of the last year.

Assuming a 15 percent discount rate, is this package worth $25 million? If not, how much is it worth?

Answer 1

The package is not worth $25 million, since the full amount is not paid immediately.

The worth can be known using present value factors.

present value factor = 1/(1+r)^n

r =15%=>0.15.

n=0,1,2,3

year	cash flow	discount factor	cash flow * discount factor
0	2,000,000	1	2,000,000
1	5,000,000	1/(1.15)^1=>0.86957	4,347,850
2	8,000,000	1/(1.15)^2=>0.75614	6,049,120
3	10,000,000	1/(1.15)63=>0.65752	6,575,200
		worth of contract	$18,972,170