Question

The Atlanta Braves signed an outfielder to a five-year contract. The contract calls for the following cash flows: a signing bonus of $4.00 million today, $12.09 million in year 1, $13.36 million in year 2, $14.17 million in year 3, $15.26 million in year 4, and $16.43 million in year 5. If the outfielder has a discount rate of 6.00% per year, what is the value of his contract today (in millions)

Answer 1

Answer:

$63.56 million

Explanation:

We are to find the present value of the cash flows in order to determine the value of the contract today

Present value is the sum of discounted cash flows

Present value can be calculated using a financial calculator

Cash flow in year 0 = $4.00 million  

Cash flow in year 1  = $12.09 million

Cash flow in year 2  = $13.36 million

Cash flow in year 3  = $14.17 million

Cash flow in year 4  = $15.26 million

Cash flow in year 5  = $16.43 million

I = 6%

Present value = $63.56 million

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute