Question

A rookie quarterback is negotiating his first nfl contract. his opportunity cost is 10%. 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:

Answer 1

Answer:

He should accept contract 2 because it has a higher present value.

 Explanation:

The numbers are missing, so I looked for a similar question:

year 1 2 3 4

Contract 1 $3,000,000 $3,000,000 $3,000,000 $3,000,000

Contract 2 $2,000,000 $3,000,000 $4,000,000 $5,000,000

Contract 3 $7,000,000 $1,000,000 $1,000,000 $1,000,000

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

we need to find the present value of each contract:

Contract 1 = $3,000,000/1.1 + $3,000,000/1.1² + $3,000,000/1.1³ + $3,000,000/1.1⁴  = $2,727,273 + $2,479,339 + $2,253,944 + $2,049,040 = $9,509,596

Contract 2 $2,000,000/1.1 + $3,000,000/1.1² $4,000,000/1.1³ + $5,000,000 /1.1⁴  = $1,818,182 + $2,479,339 + $3,005,259 + $3,415,067 = $10,717,847

Contract 3 $7,000,000/1.1 + $1,000,000/1.1² + $1,000,000/1.1³ + $1,000,000/1.1⁴  = $6,363,636 + $826,446 + $751,315 + $683,013 = $8,624,410