Question
In: Finance
Boston Bruins – the ice hockey team - has offered Bobby Esposito the following two contract...
Boston Bruins – the ice hockey team - has offered Bobby Esposito the following two contract options. The first contract offer is $3 million a year for 5 years (first payment a year from now) plus a signing bonus of $1 million (paid immediately). The second five year contract offers a first-year payment of $2.5 million dollars (paid one year from now), but after that the payments grow at an annual rate of 12%. Assuming the interest rate is 5%, what is the PV of option A and of option B?Which contract should Mr. Esposito choose? (upload a file with your work and answer)
Solutions
Expert Solution
The present value of option A is calculated as follows
PV of option A = $ 1,000,000 + $ 3,000,000 
(1+0.05)1 + $ 3,000,000
(1+0.05)2 + $ 3,000,000
(1+0.05)3 + $ 3,000,000
(1+0.05)4 + $ 3,000,000
(1+0.05)5
PV of option A = $ 13,988,430.01
____________________________________________________
The cash flows of option B contract is as follows
| Year | Cash flows |
| 1 | 2,500,000 |
| 2 | 2,800,000 |
| 3 | 3,136,000 |
| 4 | 3,512,320 |
| 5 | 3,933,798 |
The present value of the cash flows option B = $ 2,500,000
(1+0.05)1 + $ 2,800,000
(1+0.05)2 + $ 3,136,000
(1+0.05)3 + $ 3,512,320
(1+0.05)4 + $ 3,933,798
(1+0.05)5
The present value of the cash flows option B = $ 13,601,457.97
________________________________________________________
Mr. Esposito should choose contract A because the present value of cash flows from contract A is higher than the present value of cash flows from contract B.
jeff jeffy answered 2 years agoRelated Solutions
An All-Pro offensive lineman is in contract negotiations. The team has offered the following salary structure...
An All-Pro offensive lineman is in contract negotiations. The
team has offered the following salary structure (note: today is
Year=0). The appropriate discount rate is 12% per year, compounded
monthly.
Year
Salary ($)
1
$3,500,000
2
$4,000,000
3
$4,500,000
4
$5,000,000
a) The lineman wants the timing of the payments
modified. (He is happy with the overall
value of the contract – so no increase in
overall value, measured in PV terms -- is
needed.)
Instead of the initial terms...
An All-Pro offensive lineman is in contract negotiations. The team has offered the following salary structure...
An All-Pro offensive lineman is in contract negotiations. The
team has offered the following salary structure (note: today is
Year=0). The appropriate discount rate is 12% per year, compounded
monthly.
Year
Salary ($)
1
$3,500,000
2
$4,000,000
3
$4,500,000
4
$5,000,00
a) The lineman wants the timing of the payments
modified. (He is happy with the overall
value of the contract – so no increase in
overall value, measured in PV terms -- is
needed.)
Instead of the initial terms...
An All-Pro defensive lineman is in contract negotiations. The team has offered the following salary structure:...
An All-Pro defensive lineman is in contract negotiations. The
team has offered the following salary structure: Time Salary 0 $
6,100,000 1 4,700,000 2 5,200,000 3 5,700,000 4 7,100,000 5
7,800,000 6 8,600,000 All salaries are to be paid in a lump sum.
The player has asked you as his agent to renegotiate the terms. He
wants a signing bonus of $9.6 million payable today and a contract
value increase of $1,600,000. He also wants an equal salary paid
every...
An All-Pro defensive lineman is in contract negotiations. The team has offered the following salary structure:...
An All-Pro defensive lineman is in contract negotiations. The
team has offered the following salary structure:
Time
Salary
0
$
6,700,000
1
$
5,300,000
2
$
5,800,000
3
$
6,300,000
4
$
7,700,000
5
$
8,400,000
6
$
9,200,000
All salaries are to be paid in lump sums. The player has asked
you as his agent to renegotiate the terms. He wants a $10.2 million
signing bonus payable today and a contract value increase of
$2,200,000. He also wants...
An All-Pro defensive lineman is in contract negotiations. The team has offered the following salary structure:...
An All-Pro defensive lineman is in contract negotiations. The
team has offered the following salary structure: Time Salary 0 $
7,400,000 1 $ 6,000,000 2 $ 6,500,000 3 $ 7,000,000 4 $ 8,400,000 5
$ 9,100,000 6 $ 9,900,000 All salaries are to be paid in lump sums.
The player has asked you as his agent to renegotiate the terms. He
wants a $10.9 million signing bonus payable today and a contract
value increase of $2,900,000. He also wants an...
An All-Pro defensive lineman is in contract negotiations. The team has offered the following salary structure:...
An All-Pro defensive lineman is in contract negotiations. The
team has offered the following salary structure:
Time
Salary
0
$
6,200,000
1
$
4,800,000
2
$
5,300,000
3
$
5,800,000
4
$
7,200,000
5
$
7,900,000
6
$
8,700,000
All salaries are to be paid in lump sums. The player has asked
you as his agent to renegotiate the terms. He wants a $9.7 million
signing bonus payable today and a contract value increase of
$1,700,000. He also wants...
An All-Pro defensive lineman is in contract negotiations. The team has offered the following salary structure:...
An All-Pro defensive lineman is in contract negotiations. The
team has offered the following salary structure:
Time
Salary
0
$
5,700,000
1
$
4,300,000
2
$
4,800,000
3
$
5,300,000
4
$
6,700,000
5
$
7,400,000
6
$
8,200,000
All salaries are to be paid in lump sums. The player has asked
you as his agent to renegotiate the terms. He wants a $9.2 million
signing bonus payable today and a contract value increase of
$1,200,000. He also wants...
An opposing player charging the net runs into the goalie for your ice hockey team, and...
An opposing player charging the net runs into the goalie for
your ice hockey team, and the goalie lays motionless on the ice.
When you get to him, he is conscious and alert but complaining of
not being able to move. He denies having any pain and is becoming
very anxious and scared. He has no difficulty breathing. You
complete your initial evaluation and find all vitals to be within
normal limits, but the athlete does not respond to painful...
Monty Hardy recently rejected a $20,058,000, five-year contract with the Vancouver Seals hockey team. The contract...
Monty Hardy recently rejected a $20,058,000, five-year contract
with the Vancouver Seals hockey team. The contract offer called for
an immediate signing bonus of $7,413,000 and annual payments of
$2,529,000. To sweeten the deal, the president of player personnel
for the Seals has now offered a $21,920,000, five-year contract.
This contract calls for annual increases and a balloon payment at
the end of 5 years.
Year 1
$2,530,000
Year 2
2,610,000
Year 3
2,690,000
Year 4
2,779,000
Year 5
2,880,000...
X Enterprises owns a professional ice hockey team, the Rockford Penguins. The company sells season tickets...
X Enterprises owns a professional ice hockey team, the Rockford
Penguins. The company sells season tickets for its upcoming
2020-2021 season and receives $816,000 cash. The season starts
November 1 and ends on April 30, with five home games occurring
monthly over the six-month hockey season. Assume that McKinnon
Enterprises' fiscal year ends on December 31.
Required: 1) Prepare journal entries to record all transactions
and adjustments necessary through 2020-2021 hockey season.
2)Indicate how the season tickets will be reported...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Compute the cost of not taking the following cash discounts. (Use a 360-day year. Do not...
- During his project presentation, Bob falls sick and performs poorly. However, his colleague, Dan, concludes that...
- A sample human input file that contains test values that a human would enter on the...
- A solution is prepared by dissolving 15 ml of methanol in 150.0 ml water at 25...
- Consider a newlywed who is planning a wedding anniversary gift of a trip to Canada for...
- We are evaluating a project that costs $868,000, has a life of eight years, and has...
- a.) Given sample data: 61.2, 61.9, 62.8, 63.1, 64.0, 64.3, 64.9, 65.5, 66.3 and 67.9, test...
ADVERTISEMENT