In: Finance
Ezekiel Elliot (a professional football player) recently signed a contract that will pay him the following amount (in millions)
Year | Payment |
---|---|
2021 | 18 |
2022 | 11 |
2023 | 13 |
2024 | 10 |
2025 | 12 |
If the annual interest rate is 5%, what is the present value (in millions) of Elliot’s contract (consider 2020 as time 0)?
Ezekiel Elliot will receive given amount in next 5 years
interest rate r = 5%
So, present value of a cash flow is
PV = CF/(1+r)^t
So, present value of contract = CF2021/(1+r) + CF2022/(1+r)^2 + CF2023/(1+r)^3 + CF2024/(1+r)^4 + CF2025/(1+r)^5
=> Present value of contract = 18/1.05 + 11/1.05^2 + 13/1.05^3 + 10/1.05^4 + 12/1.05^5 = $55.98 million