Question

A professional athlete signs a four-year contract in which the earnings can be modeled by

c = 500,000 + 600,000t,

where t represents the year.

(a) Find the actual value of the athlete's contract.

(b) Assuming an annual inflation rate of 4%, what is the present value of the contract? (Round your answer to two decimal places.)

Answer 1

A) Actual value of athlete's contact (c) = 500,000 + 600,000t

Where the contract period is 4 years.

Actual value of athlete's contact = 500,000+ [600,000 X 4] = 2,900,000

B) Here Inflation rate 4% is considered as discounting factor

calculation for present value of contract is as follows

Year	Cash flow	Discounting factor ( Inflation rate 4%)	Discounted cash flows
0	500,000	1.000	500,000
1	600,000	0.962	577,200
2	600,000	0.925	555,000
3	600,000	0.889	533,400
4	600,000	0.855	513,000
		Present value of the contract (i. e total sum of discounted cash flows )	2,678,600