Sam Bradford, a top five draft pick of the St. Louis Rams, and his agent are eva

Question

Sam Bradford, a top five draft pick of the St. Louis Rams, and his agent are evaluating three contract options. Each option offers a signing bonus and a series of payments over the life of thecontract. Bradford uses a 9.35 percent rate of return to evaluate the contracts. Given the cash flows for each option below, find the present value of each alternative.

Year Cash Flow Type Option A Option B Option C
0 Signing Bonus $3,100,000 $4,000,000 $4,250,000
1 Annual Salary $650,000 $825,000 $550,000
2 Annual Salary $715,000 $850,000 $625,000
3 Annual Salary $822,250 $925,000 $800,000
4 Annual Salary $975,000 $1,250,000 $900,000
5 Annual Salary $1,100,000 $1,000,000
6 Annual Salary $1,250,000

(If you solve this problem with algebra round intermediate calculations to 6 decimal places, in all cases round your input answers to the nearest dollar.)

a. Find the present value of each alternatives:

Present value of Option A -? $
Present value of Option B-? $
Present value of Option C-? $

b. Which option should he choose ?

He should choose -?

Option A
Option B
Option C

Explanation / Answer

net present value =NPV = PV0 +PV1 ....................... + PV6 present value for Year 0 - 6

PVn = cash flow/(1+R)n

a

PV0 = $3,100,000

PV1 = ($650,000)/(1+0.935) =594421.6

PV2 = ($715,000)/(1+0.935)2 =597955

PV3 = ($822,500)/(1+0.935)3 =628850.7

PV4= ($975,000(1+0.935)4=681913.8

PV5 = ($1,100,000(1+0.935)5 =703556.1

PV6 = ($1,250,000(1+0.935)6 =731134.5

NPVa = 3110000+3937832 = $7037832

similarly

NPVb = 4000000+3686952 = $7686592

NPVa = 4250000+2266953= $6516953

He will choose A

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