Question

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
Year 5 balloon payment		8,431,000
Total		$21,920,000

Suppose you are Hardy’s agent and you wish to evaluate the two contracts using a required rate of return of 16 percent. In present value terms, how much better is the second contract? (Round present value factor calculations to 4 decimal places, e.g. 1.2151 and final answers to 0 decimal places, e.g. 125. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Present value of old contract
Present value of new contract

In present value terms, the second contract is not better/better than the old one.

Answer 1

Present Value of Old Contract
Year	Remuneration (a)	PV Factor @ 16% (b)	Present Value (a*b)
1	$        7,413,000	0.8621	$        6,390,517
1	$        2,529,000	0.8621	$        2,180,172
2	$        2,529,000	0.6407	$        1,620,223
3	$        2,529,000	0.5523	$        1,396,744
4	$        2,529,000	0.4761	$        1,204,090
5	$        2,529,000	0.4761	$        1,204,090
		Total	$      13,995,837
Present Value of New Contract
Year	Remuneration (a)	PV Factor @ 16% (b)	Present Value (a*b)
1	$        2,530,000	0.8621	$        2,181,034
2	$        2,610,000	0.7432	$        1,939,655
3	$        2,690,000	0.6407	$        1,723,369
4	$        2,779,000	0.5523	$        1,534,817
5	$        2,880,000	0.4761	$        1,371,205
5	$        8,431,000	0.4761	$        4,014,109
		Total	$      12,764,190

In present value terms, old contract is better than new contract.