Question

The BJs are offering a $10,000,000 contract to play five years which can be paid in one of two ways:

1: $2,000,000 per year for 5 years paid at the end of each yr.

2. $2,000,000 signing bonus (at the beginning of yr 1) and $1,600,000 per year for each of the 5 years paid at the end of each year.

The player can earn 10% on his money, which payout should he take? Show work for each calculaton

Answer 1

Option 1

Using financial calculator to calculate the present value

Inputs: N= 5

I/y= 10%

Pmt= 2,000,000

Fv= 0

Pv= compute

We get, present value of the option 1 as $7,581,573.54

Option 2

Using financial calculator to calculate the present value

Inputs: N= 5

I/y= 10%

Pmt= 1,600,000

Fv= 0

Pv= compute

We get, present value of the option 2 as $6,065,258.83

Total present value of option 2 = 2,000,000 + 6,065,258.83

= $8,065,258.83

As the present value of option 2 is more than option 1 , he should choose Option 2