Question

Kim and Kanye have hired you to determine who has the best endorsement offer.

Kim has been offered the job as a spokesperson for the National Library Foundation. The NFL will pay her $4,000 per month starting ten years from today for a total of 120 months. She then will receive $80,000 per year for six years with the first payment of $80,000 occuring one month after the last payment of $4,000. She also will receive$140,000 every year for five years with the first of these coming six months from today.

Kanye has been offered a job as the spokesperson for the National Literacy Society. The NLS will pay him $60,000 per year for twenty years with the first of these coming today. He will also recieve 800,000 six months after his last payment of $30,000. Finally he will receive $1,000,000 fifty years from today - he was worried that he would not have enough for a 75th birthday gift for himself.

They want to know who has the best offer in today's dollars. Assume an 9% (compounded monthly) rate for your analysis.Use a financial calculator and a timeline

Answer 1

For Kim time line will look like this

Kim		Time line
# months	0	6	18	30	42	54	120	121	……………..	240	241	253	265	277	289	301
Amount		140000	140000	140000	140000	140000		4000	4000...........	4000	80000	80000	80000	80000	80000	80000

Now we need to find Present value of all future cash flows at time 0

1. FV = 140000, N = 6 , I/R = 0.09/ 12 (compounded monthly) , PMT = 0 CPT PV = 133862.12

2. FV = 140000, N = 18 , I/R = 0.09/ 12 (compounded monthly) , PMT = 0 CPT PV = 122381.86

3. FV = 140000, N = 30 , I/R = 0.09/ 12 (compounded monthly) , PMT = 0 CPT PV = 111886.17

4. FV = 140000, N = 42 , I/R = 0.09/ 12 (compounded monthly) , PMT = 0 CPT PV = 102290.60

5. FV = 140000, N = 54 , I/R = 0.09/ 12 (compounded monthly) , PMT = 0 CPT PV = 93517.97

6 FV = 0, N =120 , I/R = 0.09/ 12 (compounded monthly) , PMT = 4000 CPT PV = 315766.77 this present value is at month 120

So We need to calculate PV at 0 now with FV = 315766.77, N =120 , I/R = 0.09/ 12 (compounded monthly) , PMT = 0 CPT PV = 128813.05

7. FV = 80000, N = 241 , I/R = 0.09/ 12 (compounded monthly) , PMT = 0 CPT PV = 13213.92

8. FV = 80000, N = 253 , I/R = 0.09/ 12 (compounded monthly) , PMT = 0 CPT PV =

$12,080.67

9. FV = 80000, N = 265 , I/R = 0.09/ 12 (compounded monthly) , PMT = 0 CPT PV =

$11,044.61

10. FV = 80000, N = 277 , I/R = 0.09/ 12 (compounded monthly) , PMT = 0 CPT PV =

$10,097.41

11. FV = 80000, N = 289 , I/R = 0.09/ 12 (compounded monthly) , PMT = 0 CPT PV =

$9,231.43

12. FV = 80000, N = 301 , I/R = 0.09/ 12 (compounded monthly) , PMT = 0 CPT PV =

$8,439.73

Total of present value of all future cash flows =

$756,859.54

Kayne has timeline as follows:

Kayne	Timeline
months	0	12	24	…….	228	234	….	600
Amount	60000	60000	60000	60000	60000	800000	0	1000000

FV = 0, N =20 , I/R = 0.09 , PMT = 60000 with mode = BGN CPT PV = 597000.6

FV = 800000 N = 234 I/R = 0.09/12 CPT PV= 139234.60

FV = 1000000 N = 600 I/R = 0.09/12 CPT PV = 11297.10

Total of present value of all future cash flows = 747538.59

Thus Kim's endorsement offer is better.