Question

Based on Present Value of Multiple Cash Flows (No discount rate is provided)

You are a professional athlete and recognized as one of the best in your sport. Fortunately for you, you are currently a free agent and deciding with which team you will sign your next contract. You have received the following three contract offers:

Team A: 5-year contract. $10 million signing bonus. Annual salary of $1 million.

Team B: 5-Year contract. $2 million signing bonus. Annual salary of $3.5 million.

Team C: 10-Year contract. No signing bonus. Annual salary of $2.5 million.

The signing bonus is received right now while the first annual salary payment is paid one year from today.

Which contract would you choose and why? Explain the financial factors that would influence your decision.

Answer 1

Lets Assume that the discounting rate is 10%

Present Value of contract = Signing Bonus + PV of salary

Team A =

= 10,000,000 + 3790786.7695

= 13,790,786.7695

Team B =

= 2,000,000 + 13267753.6932

= 15,267,753.6932

Team C =

= 15,361,417.765

Contract with Team C should be accepted as it gives the highest present Value.

Now factors that would influence the decision ar : -

• Duration of Contract.
• Present Value of Contract.