Question

a. Suppose the management fee of $350,000 does not get collected this year but instead the contract just gets extended one year so that no money comes in to the city this year, but next year the team pays $350,000 and $350,000 for each year until the end of the contract. (The article doesn’t say how long the contracted management fee of $350,000 is in place or if the dollar value of the fee increases over time. For the purpose of answering this question consider a multi-year contract of “x” years so now it would be “x+1” years and that instead of the payments starting today in year 0, the payments start one year from now in year 1.) Does the delay in payment make any difference since the city will still collect the $350,000 just at a later date? Explain.

b. The city anticipated collecting just over $470,000 in an added city sales tax at the stadium and the surrounding business. Suppose the city thought now thinks there is a 40% chance that the sales tax would bring $260,000 and a 60% chance that it might bring in $150,000 depending on when the limitations in business/crowds due to the virus subsides. Calculate the new expected value of the sales tax.

Answer 1

A) In the above case first of all we have to know the concept of "Time Value of Money" which explain us if we receive a single dollar today and the value of single dollar today and if we receive the same dollar in the upcoming days and the value at that time is totally different. So if Managment fee received after a delay of one year than we will definately lose the time value or may be the value of dollar in upcomng day will be depreciated againt the other currency in the upcoming year so we have to suffer a lose due to that. lets understand this concept while taking an example.

Example:  Suppose there is a person David wants to invest in Bond of $ 1000(Face Value) @ 1100  Reedeemable after 4 years @$1200 Coupon rate 8% P.a. have to decide is investment in bond is better for david? and if the discounting factor is 10% we are considering.

Answer: Firstly we have to find the present value of both these invest at the time 0 level that's the only why to compare this two investment.

Investment 1st:

Year	1	2	3	4	4	Total Spending at time (T0)
Interst on bond receive every year and redeemable value in last year	80	80	80	80	1200
present value discounitng factor @10%	0.9090	0.8264	0.7513	0.6830	0.6830
present value of cashflows	72.72	66.112	60.104	54.64	819.6	1073.176

as we see in the above table the present value of all the income through this bond is $ 1073.176 which is the intrinsic value of bond but the actually price is $1100 which is more than that so we should suggest david not to invest in this bond.

B) The new Expected value of sales tax will be as per below calculation:-

0.40*260000 + 0.60*150000 =$104000 + $90000 = $194000

the new expected value of sales tax would be $ 194000. we will use the given probability to calculate this expected sale tax value.