Question

Tom Brady is ready to sign his contract with the tampa bay buccaneers. The team gave him 3 options, and he asked you to help him make the best decision. He knows that all payments will be made at the beginning of each season.

contract A

the contract pays $30,000,000 per year for 10 years.

contract B

the contract pays $20,000,000 for the first 3 years. after it pays 40,000,000 for the following 5 years. for the last three years it pays $70,000,000.

contract C

the contract pays $75,000,000 for the first 2 years. after it pays $20,000,000 for 5 years. for the last 3 years the contracts pays 10,000,000.

you know the market interest rate is 8%

what would you advise tom brady?

Answer 1

PV of Contract A =(1+r)*Contract Payment Per year*((1-(1+r)^-n)/r) =(1+8%)*30000000*((1-(1+8%)^-10)/8%) =217406637.33

PV of Contract B =20000000+20000000/1.08+20000000/1.08^2+40000000/1.08^3+40000000/1.08^4+40000000/1.08^5+40000000/1.08^6+40000000/1.08^7+70000000/1.08^8+70000000/1.08^9+70000000/1.08^10 =297849301.22

PV of Contract C =75000000+75000000/1.08+20000000/1.08^2+20000000/1.08^3+20000000/1.08^4+20000000/1.08^5+20000000/1.08^6+10000000/1.08^7+1000000/1.08^8+10000000/1.08^9 =229761181.71

Sign Contract B as it has highest NPV