Question

You are the number one free agent in the National Hackey-Sack League. You get offered three different 5-year contracts, denoted A, B, and C below. Assuming you can earn 12% per year on your investments, which contract should you take?

Contract A: You are offered $100,000 today, $200,000 in one year, and a final payment of $200,000 in five years.

Contract B: You will get $200,000 today, $200,000 in three years, and a final payment of $100,000 in five years.

Contract C: You will get $100,000 each of the next five years.

Answer 1

Solution :

The present value of the cash inflows from Contract A = $ 392,056.80

The present value of the cash inflows from Contract B = $ 399,098.74

The present value of the cash inflows from Contract C = $ 360,477.62

Contract B has the highest present value of the cash inflows at $ 399,098.74 . Thus Contract B should B taken up.

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