Question

Suppose Mats Sundin decided to make another comeback with the Toronto Maple Leafs in 2016. The Leafs offer him a two-year contract in January 2016 with the following provisions:  

a.	$5.6 million signing bonus.
b.	$6.6 million per year for two years.
c.	Seven years of deferred payments of $2.05 million per year, starting at the end of year 2.
d.	A games-played bonus provision that totals $1.32 million per year for the two years of the contract.

Assume that Mats achieved his bonus requirements both years and he signed the contract right away on January 1, 2016. Assume that cash flows are discounted at 11.6 percent. Ignore any taxes. Mats’ signing bonus was paid on the day the contract was signed. His salary and bonuses, other than the signing bonus, are paid at the end of the year. What was the PV of this contract in January when Mats signed it? (Do not round intermediate calculations. Round the answer to 2 decimal places. Omit $ sign in your response.)

Answer 1

The answer is that PV of this contract in January when Mat signed it = 27,546,547.50 (or 27.55 millions)

Explanation and calculations:

Here $5.6 million will be received immediately and hence I have shown this cash flow to occur at time point 0. Cash flow at the end of year 1= (6.6 million + 1.32 million) = 7,920,000. Cash flow at the end of year 2 = (6.6 million + 1.32 million + 2.05 million) = $9,970,000. As the seven years of deferred payments of $2.05 million per year is starting at the end of year 2 it will continue till end of year 8 and this will make a total of 7 payments.

Formula’s used:

PVIF = 1/(1+r)^n; where r = discount rate and n is the year of cash flow. PV = cash flow * PVIF and NPV is the sum of all PVs.

The calculations and formulas can be seen in the 2 images attached below. The answer is that PV of this contract in January when Mat signed it = 27,546,547.50.