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

A:

Discount rate	12.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
100,000.000	0	100,000.00	100,000.00
200,000.000	1	178,571.43	278,571.43
-	2	-	278,571.43
-	3	-	278,571.43
-	4	-	278,571.43
200,000.000	5	113,485.37	392,056.80

Present value = 392,056.80

B:

Discount rate	12.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
200,000.000	0	200,000.00	200,000.00
-	1	-	200,000.00
-	2	-	200,000.00
200,000.000	3	142,356.05	342,356.05
-	4	-	342,356.05
100,000.000	5	56,742.69	399,098.74

PV of B = 399,098.74

C:

Discount rate	12.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
-	0	-	-
100,000.000	1	89,285.71	89,285.71
100,000.000	2	79,719.39	169,005.10
100,000.000	3	71,178.02	240,183.13
100,000.000	4	63,551.81	303,734.93
100,000.000	5	56,742.69	360,477.62

PV of C = 360,477.62

so choose B