Question

5.20 A rookie quarterback is negotiating his first NFL contract. His opportunity cost is 6%. 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	$3,500,000	$3,500,000	$3,500,000	$3,500,000
Contract 2	$2,000,000	$3,000,000	$4,000,000	$5,500,000
Contract 3	$7,000,000	$1,500,000	$1,500,000	$1,500,000

As his adviser, which contract would you recommend that he accept?

Select the correct answer.

a. Contract 2 gives the quarterback the highest present value; therefore, he should accept Contract 2.

b. Contract 3 gives the quarterback the highest present value; therefore, he should accept Contract 3.

c. Contract 1 gives the quarterback the highest present value; therefore, he should accept Contract 1.

d. Contract 1 gives the quarterback the highest future value; therefore, he should accept Contract 1.

e. Contract 3 gives the quarterback the highest future value; therefore, he should accept Contract 3

Answer 1

Solution :

Present Value of Contract 1 = $ 12,127,869.64

Present Value of Contract 2 = $ 12,271,774.05

Present Value of Contract 3 = $ 10,386,337.66

The Present value of Contract 2 is the highest when compared to the present values of Contracts 1 & 3.

Thus the quarterback should choose Contract 2.

The solution is Option a. Contract 2 gives the quarterback the highest present value; therefore, he should accept Contract 2

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.