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Assume that two athletes sign 10-year contracts that pay out a total of $100 million over...

Assume that two athletes sign 10-year contracts that pay out a total of $100 million over the life of the contracts. One contract will pay the $100 million in equal installments over the 10 years. The other contract will pay the $100 million in installments, but the installments increase 5% per year. Which athlete received the better deal? You must show your work and explain your position in detail.

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Answer #1

Athlete 1:

Total cash flows for 10 years = $ 100 M

Contract period = 10 years

Cash flow per anum = $ 10 M

Athlete 2:

Athlete 2 receives the following cash flows during 10 years

Let "X" be the CF in the begining year

Eventhough both athletes received total of $ 100 M over a period of 10 yeras, Athlete 1 has received more CF in the begining years and giving him the benifit of Time Value of Money.

Thus Athlete 1 has the best deal compared to Athlete 2

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