In 2015, a running back signed a contract worth $62.3 million. The contract called for $10...

In 2015, a running back signed a contract worth $62.3 million. The contract called for $10 million immediately and a salary of $3.5 million in 2015, $9.5 million in 2016, $10 million in 2017, $9.4 million in 2018 and 2019, and $10.5 million in 2020.

If the appropriate interest rate is 8 percent, what kind of deal did the running back scamper off with? Assume all payments other than the first $10 million are paid at the end of the contract year.

Present value =?

Note: the answer is not 49.25 or 13.25 or -13.25

Expert Solution

PV = Million 36.23

Year	Year	Cash flow	PVF@ 8%	PVCF
0	2015 Begin	$ 10.00	1.0000	10.00
1	2015 End	$ 3.50	0.9259	3.24
2	2016 End	$ 9.50	0.8573	8.14
3	2017 End	$ 10.00	0.7938	7.94
4	2018 End	$ 9.40	0.7350	6.91
5	2019 End	$ 9.40	0.6806	6.40
6	2020 End	$ 10.50	0.6302	6.62

NPV	36.23

PV for year 1 = 1/1.08

PV for year 2 = 1/1.08^2

PV for year 3 = 1/1.08^3

jeff jeffy answered 2 years ago

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