Dallas cowboys wide receiver John Young will earn either $11,406,000 over 12 yea
ID: 2427024 • Letter: D
Question
Dallas cowboys wide receiver John Young will earn either $11,406,000 over 12 years or $8,600,000 over 6 years. Young must declare which plan he prefers. The $11 million package is deffered through the year 2017, while the non-deferred arrangement ends after the 2011 season. Regardless of which plan is chosen, Young will be playing through the 2011 season. The details of the two plans are given below. Write the assumptin on the planning horizon
Total $11,406,000 $8,600,000
Young's TVOM is 6%. Based on Present worth, Future Worth and Annual worth, find the best plan for John Young. (Year 2006 is EOY = 0)
Year Deferred Non deferred 2006 $2,000,000 $2,000,000 2007 $566,000 $900,000 2008 $920,000 $1,000,000 2009 $930,000 $1,225,000 2010 $740,000 $1,500,000 2011 $740,000 $1,975,000 2012 $740,000 2013 $790,000 2014 $540,000 2015 $1,040,000 2016 $1,040,000 2017 $1,260,000Explanation / Answer
Solution:
Deferred Plan Non - Deferred Plan Year Amount PVIF @ 6% Present value Amount PVIF @ 6% Present value 2006 2,000,000 0.943 1,886,792.45 2,000,000 0.943 1,886,792.45 2007 566,000 0.890 503,737.99 900,000 0.890 800,996.80 2008 920,000 0.840 772,449.74 1,000,000 0.840 839,619.28 2009 930,000 0.792 736,647.11 1,225,000 0.792 970,314.74 2010 740,000 0.747 552,971.05 1,500,000 0.747 1,120,887.26 2011 740,000 0.705 521,670.80 1,975,000 0.705 1,392,297.07 2012 740,000 0.665 492,142.26 2013 790,000 0.627 495,655.77 2014 540,000 0.592 319,625.17 2015 1,040,000 0.558 580,730.57 2016 1,040,000 0.527 547,859.03 2017 1,260,000 0.497 626,181.40 11,406,000 8,036,463.33 8,600,000 7,010,908 Based on present worth, Deferred plan is best suited as it has more present value than Non-deferred planRelated Questions
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