Bryce Harper reportedly signed a 10 year $300 Million deal to play for the Phillies. Aside...

Bryce Harper reportedly signed a 10 year $300 Million deal to play for the Phillies. Aside from incentives, the deal pays him a $50 Million dollar signing bonus, $20 Million for the first 5 years, starting a year from now and $30 Million for the remaining 5 years. What is the value of this contract if his required return is 7% per year? If his options on alternative investments falls to 5% how will this impact the value of his contract?

Suppose Bryce puts the entire $50 Million signing bonus in an investment account returning 7%/ year compounded monthly? How much will that account be worth when his contract expires?

Solutions

Expert Solution

Part A:

Value of Contract is PV of CFs from it.

PV of CF = CF * PVF(r%, n)

PVF(r%, n) = 1 / ( 1 + r)^n

r = Required Ret

n = Time period

Year	CF	PVF @7%	PV of CFs
0	$ 5,00,00,000.00	1	$ 5,00,00,000.00
1	$ 2,00,00,000.00	0.934579	$ 1,86,91,588.79
2	$ 2,00,00,000.00	0.873439	$ 1,74,68,774.57
3	$ 2,00,00,000.00	0.816298	$ 1,63,25,957.54
4	$ 2,00,00,000.00	0.762895	$ 1,52,57,904.24
5	$ 2,00,00,000.00	0.712986	$ 1,42,59,723.59
6	$ 3,00,00,000.00	0.666342	$ 1,99,90,266.71
7	$ 3,00,00,000.00	0.62275	$ 1,86,82,492.26
8	$ 3,00,00,000.00	0.582009	$ 1,74,60,273.14
9	$ 3,00,00,000.00	0.543934	$ 1,63,18,012.28
10	$ 3,00,00,000.00	0.508349	$ 1,52,50,478.76
Value of Investment			$ 21,97,05,471.87

Part B:

Year	CF	PVF @5%	PV of CFs
0	$ 5,00,00,000.00	1.0000	$ 5,00,00,000.00
1	$ 2,00,00,000.00	0.9524	$ 1,90,47,619.05
2	$ 2,00,00,000.00	0.9070	$ 1,81,40,589.57
3	$ 2,00,00,000.00	0.8638	$ 1,72,76,751.97
4	$ 2,00,00,000.00	0.8227	$ 1,64,54,049.50
5	$ 2,00,00,000.00	0.7835	$ 1,56,70,523.33
6	$ 3,00,00,000.00	0.7462	$ 2,23,86,461.90
7	$ 3,00,00,000.00	0.7107	$ 2,13,20,439.90
8	$ 3,00,00,000.00	0.6768	$ 2,03,05,180.86
9	$ 3,00,00,000.00	0.6446	$ 1,93,38,267.49
10	$ 3,00,00,000.00	0.6139	$ 1,84,17,397.61
Value of Investment			$ 23,83,57,281.17

Part C:

Future Value:
FV = PV (1+r)^n
Where r is Int rate per period
n - No. of periods

Particulars	Amount
Present Value	$ 5,00,00,000.00
Int Rate	0.5833%
Periods	120

Future Value = Present Value * ( 1 + r )^n
= $ 50000000 ( 1 + 0.005833) ^ 120
= $ 50000000 ( 1.005833 ^ 120)
= $ 50000000 * 2.0097
= $ 100483068.83
Pls comment, if any further assistance is required.

jeff jeffy answered 1 year ago

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