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liberstina [14]
3 years ago
9

A rookie quarterback is negotiating his first NFL contract. His opportunity cost is 10%. He has been offered three possible 4-ye

ar 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 $3,000,000 $3,000,000 $3,000,000 $3,000,000 Contract 2 $2,500,000 $3,000,000 $4,000,000 $5,000,000 Contract 3 $7,000,000 $1,500,000 $1,500,000 $1,500,000 As his advisor, which contract would you recommend that he accept?
Business
1 answer:
Sati [7]3 years ago
6 0

Answer:

Contract 3 has the higher present value. Therefore, it is the most convinient.

Explanation:

Giving the following information:

His opportunity cost is 10%.

Contract 1

$3,000,000

$3,000,000

$3,000,000

$3,000,000

Contract 2

$2,500,000

$3,000,000

$4,000,000

$5,000,000

Contract 3

$7,000,000

$1,500,000

$1,500,000

$1,500,000

We need to find the present value of each contract to compare.

PV= CF/(1+i)^

CF= cash flow

Contract 1:

PV= 3,000,000/(1.10) + 3,000,000/(1.10^2) + 3,000,000/(1.10^3) + 3,000,000/(1.10^4)

PV= $9,509,596.34

Contract 2:

PV= $11,172,392.6

Contract 3:

PV= $9,754,798.17

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Answer:

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Explanation:

AFC = Average Fixed Cost, AVC = Average Variable Cost, MC = Marginal Cost

Average Fixed Cost is defined as the fixed cost of production divided by the quantity produced. Mathematically given as:

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Average Variable Cost is defined as the variable cost of production divided by the quantity produced. Mathematically given as:

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Marginal Cost is defined as the cost incurred for an additional unit to be produced. Mathematically given as:

MC = ΔC ÷ ΔQ

The firm discovered a more efficient technology implies that the cost of production is reduced. The result of this is that the fixed cost (FC) is reduced and consequently, the AFC is reduced as well. Hence, the AFC curve shifts downward. We therefore see that a reduction in fixed costs (due to the discovery of a more efficient technology) results in the AFC curve shifting downwards

<u>Hence, Option A (a downward shift in the AFC curve) is the correct answer </u>

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