Question

Landon Lowman, star quarterback of the university football team, is thinking about forgoing his last two years of eligibility and making himself available for the professional football draft. Scouts estimate that Landon could receive a signing bonus of $1.5 million today along with a five-year contract for $3 million per year (payable at the end of the year). They further estimate that he could negotiate a contract for $5.5 million per year for the remaining seven years of his career.

The scout believe, however, that Landon will be a much higher draft pick if he improves by playing out his eligibility. If he stays at the university, he is expected to receive a $2.5 million signing bonus in two years along with a 5-year contract for $5 million per year. After that, the scouts expect Landon to obtain a five-year contract for $6 million per year to take him into retirement.

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Assume that Landon can earn a 8% return over this time. Should Landon stay or go?

Answer 1

PV of Landon entering the draft:

Signing bonus = $ 1,500,000

Initial contract = $3,000,000 x [ 1-(1.08)^-5] / .08   = 11,978,130.11

Subsequent contract = [$5,500,000 x{1-(1.08)^-7} / .08] × (1.10)^-5 = 17,780,104.02

PV     = $31,258,234.13

PV of Landon playing out his eligibility:

Signing bonus = $2,500,000 x (1.08)^-2    = $2,143,347.05

Initial contract = $5,000,000 x [{1 - (1.08)^-5} / 0.08] ×(1.08)^-2      = 17,115,526.56

Subsequent contract = $6,000,000 x [{1 - (1.08)^-5} / 0.08] ×(1.08)^-7 = 13,978,247.75

PV = $33,237,121.36

Since the PV of playing out his eligibility and then entering the draft is higher, Landon should stay in college.