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A rookie quarterback is negotiating his first NFL contract. His opportunity cost is 10%. He has been offered three possible 4-year contracts. Payments are guaranteed, and they would be made at the end of each year. Terms of each contract are as follows: 1 2 3 4 Contract 1 $3,000,000 $3,000,000 $3,000,000 $3,000,000 Contract 2 $2,500,000 $3,000,000 $4,000,000 $5,000,000 Contract 3 $7,000,000 $1,500,000 $1,500,000 $1,500,000 As his advisor, which contract would you recommend that he accept?

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facundobuzzetti

Answer:

Contract 3 has the higher present value. Therefore, it is the most convinient.

Explanation:

Giving the following information:

His opportunity cost is 10%.

Contract 1

$3,000,000

$3,000,000

$3,000,000

$3,000,000

Contract 2

$2,500,000

$3,000,000

$4,000,000

$5,000,000

Contract 3

$7,000,000

$1,500,000

$1,500,000

$1,500,000

We need to find the present value of each contract to compare.

PV= CF/(1+i)^

CF= cash flow

Contract 1:

PV= 3,000,000/(1.10) + 3,000,000/(1.10^2) + 3,000,000/(1.10^3) + 3,000,000/(1.10^4)

PV= $9,509,596.34

Contract 2:

PV= $11,172,392.6

Contract 3:

PV= $9,754,798.17

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