Question

In 2012, a baseball player signed a contract reported to be worth $63.7 million. The contract was to be paid as $8.7 million in 2012, $10.1 million in 2013, $11.1 million in 2014, $11.2 million in 2015, $11.2 million in 2016, and $11.4 million in 2017. Required: If the appropriate interest rate is 11 percent, what kind of deal did the player snag? Assume all payments are paid at the end of the year

Present Value $

Answer 1

In 2012, the player signed a contract and reported to be receiving an amount of $63.7 million in the next 6 years. So basically the contract had a future value which the player struck but we need to discount it at 11% to find the exact present value of it,

So, PV of the future Cash outflows in the beginning of 2012, will be; Value in 2012/ (1 + rate of interest) ^1 + Value in 2013/ (1 + rate of interest) ^2 + Value in 2014/ (1 + rate of interest) ^3 + Value in 2015/ (1 + rate of interest) ^4 + Value in 2016/ (1 + rate of interest) ^5 + Value in 2017/ (1 + rate of interest) ^6 +

Or, $8.7/(1.11) + $10.1/(1.11)^2 + $11.1/(1.11)^3 + $11.2/(1.11)^4 + $11.2/(1.11)^5 + $11.4/(1.11)^6

Or, $7.84 + $8.20 + $8.12 + $7.38 + $6.65 + $6.09 = $44.28

So the future value of $63.7million which is going to be accumulated over a period of 6 years had a present valuation of $44.28million.