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how can i put in the financial calculator

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PV OF CASH FLOW STREAM

A rookie quarterback is negotiating his first NFL contract. His opportunity cost is 6%. He has been offered three possible 4-year contracts. Payments are guaranteed, and they would be made at the end of each year. Terms of each contract are as follows:

1

2

3

4

Contract 1	$2,500,000	$2,500,000	$2,500,000	$2,500,000
Contract 2	$2,500,000	$3,500,000	$4,500,000	$5,000,000
Contract 3	$7,000,000	$1,500,000	$1,500,000	$1,500,000

As his adviser, which contract would you recommend that he accept?

Select the correct answer.

a. Contract 1 gives the quarterback the highest present value; therefore, he should accept Contract 1.

b. Contract 2 gives the quarterback the highest present value; therefore, he should accept Contract 2.

c. Contract 1 gives the quarterback the highest future value; therefore, he should accept Contract 1.

d. Contract 3 gives the quarterback the highest future value; therefore, he should accept Contract 3.

e. Contract 3 gives the quarterback the highest present value; therefore, he should accept Contract 3.

Answer 1

Contract 1

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= $0.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the opportunity cost of 6%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 6% opportunity cost is $8,662,764.03.

Contract 2

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= $0.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the opportunity cost of 6%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 6% opportunity cost is $13,212,233.20.

Contract 3

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= $0.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the opportunity cost of 6%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 6% opportunity cost is $10,386,337.66.  

I would recommend accepting contract 2 since it generates the highest net present value.

Hence, the answer is option b.

In case of any query, kindly comment on the solution.