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In: Finance

Michael received a professional baseball contract paying $7,000,000 per year for 5 years, Bert received a...

Michael received a professional baseball contract paying $7,000,000 per year for 5 years, Bert received a two -year contract for $16,000,000 per year. For purposes of calculations. treat these contracts as ordinary annuities. who's contract has a greater present value if we assume discount rate of 6%?
a. bert= $29,334,283
b. Michael = $ 29, 486,547
c. bert= $39,459651
d. Michael = $39,743,196

Solutions

Expert Solution

Case 1 : Michael
Michael received a professional contract paying $7,000,000 per year for 5 years.
Discount Rate 6%.

Present Value = PVAF(6%,5) * 7,000,000
= 4.21236378 * 7,000,000
        = $29,486,547

Alternatively,
In financial terms,
PMT = $7,000,000
Interest Rate = 6%
No of Periods = 5

We have to find PV.

By using the formula to calculate PMT in excel. The formula is
=PV(Rate, NPer, PMT, Future Value, Type)
where,
Rate = Interest Rate
NPer = No of Periods
PMT = Periodic Payments
FV = Future Value           
Type is 0 if PMT are made on the end of year and 1 if the payments are made at the beginning of year. Since these are annual payments we assume it to be paid at the end of year.

Using the formula
PV = $29,486,547

This is the present value of Michael ordinary annuities.


Case 2 : Bert
Bert received a professional contract paying $16,000,000 per year for 2 years.
Discount Rate 6%.

Present Value = PVAF(6%,2) * 16,000,000
                                = 1.83339266 * 16,000,000
                                = $29,334,283

Alternatively,
In financial terms,
PMT = $16,000,000
Interest Rate = 6%
No of Periods = 2

We have to find PV.

By using the formula to calculate PMT in excel. The formula is
=PV(Rate, NPer, PMT, Future Value, Type)

PV = $29,334,283

This is the present value of Bert ordinary annuities.

Michael has a great present value of as compared to Bert.
Option b. is correct.

jeff jeffy answered 1 year ago
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