Question

A baseball player is offered a 5-year contract that pays him the following amounts:

Year 1: $1.05 million

Year 2: $1.81 million

Year 3: $2.07 million

Year 4: $2.58 million

Year 5: $3.35 million

Under the terms of the agreement all payments are made at the end of each year. Instead of accepting the contract, the baseball player asks his agent to negotiate a contract that has a present value of $1.92 million more than that which has been offered. Moreover, the player wants to receive his payments in the form of a 5-year ANNUITY DUE. All cash flows are discounted at 11.00 percent. If the team were to agree to the player's terms, what would be the player's annual salary (in millions of dollars)? (Express answer in millions. $1,000,000 would be 1.00)

Answer 1

first we have to compute the present vlaue of existing contract
year	Cash flow	PVIF @ 11%	present value
1	1.05	0.900901	0.95
2	1.82	0.811622	1.48
3	2.07	0.731191	1.51
4	2.58	0.658731	1.70
5	3.35	0.593451	1.99
PV =			7.62
Therefore new PV =		9.54
7.62+1.92
Computation of new annual payment
put in calculator. Set the calculator at begin mode
FV			0
PV			(9.54)
I			11%
N			5
compute PMt		$2.33
Ans =			2.33