Question

Assume that two phenomenal Canadian athletes sign 10-year contracts that pay a total of $100 million over the life of the contract. Andrew Wiggins' contract will pay the $100 million in equal installments over the ten years. Dave Rolling's contract will pay the $100 million in installments, but the installments will increase 5% per year. Explain which athlete received the better deal.

Answer 1

Solution:

Option A:

Andrew Wiggins' contract

In this contract, the payment is in equal installment which means that the payment is equally distributed from the starting period to end period

Dave Rolling's contract will pay the $100 million in installments, but the installments will increase 5% per year

In this contract, the payment is in increasing installment which means that the payment in the initial period is low and high in the end period.

If there is an interest rate then according to the time value of money the contract of Dave Rolling will have a lesser net present value.

We do not need to do any calculation as we know that a dollar is worth more today as compared to a dollar in the future.