You are a prominent professional baseball coach who is searching for a new team
ID: 2638538 • Letter: Y
Question
You are a prominent professional baseball coach who is searching for a new team to coach. You have been offered several contracts:
Chicago: A signing bonus of $2.5M, $3M for the next three years, and $IM for the remaining five years.
Detroit: $4M for the first four years and $250,000 for the next four years.
New York: A signing bonus of $5M, $2M in year 1, $IM in your second year, and $750,000 for the remaining six years.
Atlanta: $2M each year for eight years.
All payments are made at the end of the year for Chicago, Detroit, and New York contracts. The Atlanta team contract stipulates payments will be made at the beginning of each period. All signing bonuses will be paid in period zero. Assume an interest rate of 8% for each contract.
1. Calculate the present value of each contract using microsoft excel.
Chicago:
Detroit:
New York:
Atlanta:
2. Based entirely on monetary terms, which contract is the best?
Explanation / Answer
Calculation of Present Value Chicago (Payment will be received at the end of year) Year Amount (in Million) PFV @ 8% Present Value 0 2.5 1 2.5 1 3 0.925925926 2.777777778 2 3 0.85733882 2.572016461 3 3 0.793832241 2.381496723 4 1 0.735029853 0.735029853 5 1 0.680583197 0.680583197 6 1 0.630169627 0.630169627 7 1 0.583490395 0.583490395 8 1 0.540268885 0.540268885 Total 13.40083292 Detroit (Payment will be received at the end of year) Year Amount (in Million) PFV @ 8% Present Value 1 4 0.925925926 3.703703704 2 4 0.85733882 3.429355281 3 4 0.793832241 3.175328964 4 4 0.735029853 2.940119411 5 0.25 0.680583197 0.170145799 6 0.25 0.630169627 0.157542407 7 0.25 0.583490395 0.145872599 8 0.25 0.540268885 0.135067221 Total 13.85713539 New York (Payment will be received at the end of year) Year Amount (in Million) PFV @ 8% Present Value 0 5 1 5 1 2 0.925925926 1.851851852 2 1 0.85733882 0.85733882 3 0.75 0.793832241 0.595374181 4 0.75 0.735029853 0.55127239 5 0.75 0.680583197 0.510437398 6 0.75 0.630169627 0.47262722 7 0.75 0.583490395 0.437617796 8 0.75 0.540268885 0.405201663 Total 10.68172132 Atlanta (Payment will be received at the begining of year) Year Amount (in Million) PFV @ 8% Present Value 0 2 1 2 1 2 0.925925926 1.851851852 2 2 0.85733882 1.714677641 3 2 0.793832241 1.587664482 4 2 0.735029853 1.470059706 5 2 0.680583197 1.361166394 6 2 0.630169627 1.260339254 7 2 0.583490395 1.166980791 Total 12.41274012 Decision :- Detroit contract is best because of maximum present value
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