Question

Present Value Suppose two athletes sign 10-year contracts for $80 million. In one case, we are told that the $80 million will be paid in 10 equal installments. In the other case, we are told that the $80 million will be paid in 10 installments, but the installments will increase by 5 percent per year. Who got the better deal?

How do we find the present value for each case? I saw it was 49.16 million for the first deal but I don't understand why.

Answer 1

It's a time value of money question. One thumb rule of it is a $ today is worth more than tomorrow.

Now, in order to find a present value, we need the discount rate which is missing in the details given. (but we can calculate it if 49.16m is the PV, then the discount rate must be 10%. How? ----- on a financial calculator, press - PV= -49.16, N=10, FV=0, PMT=8, I/Y=?)

However, even without getting into that depth, given the discount rate remains the same in both the deals, first deal is better than the second as it gives us more amount in the nearer term in the future.