You are the financial advisor for a musician who is in the process of negotiatin

Question

You are the financial advisor for a musician who is in the process of negotiating a recording contract.The company is offering him two possible contracts.With each contract the first payment is made upon receipt (year 0).If the musician discounts cash flows at 4%, which of the two contracts below has the highest net present value?

                                                                Contract 1                           Contract 2

                Year 0(today)                     $2.0million                          $2.5million

                Year 1                                    1.5million                           1.5million

                Year 2                                    1.5million                         1.0million

                Year 3                                    1.5million                         1.0million

                NPV                                     ________                         ________

Explanation / Answer

Year Contract 1 ($)(in Mn) Contract 2 ($)(in Mn) PV factor(4%) Present Value of Contract 1 ($)(in Mn) Present Value of Contract 2 ($)(in Mn) 1 2 2.5 1 2.0 2.5 2 1.5 1.5 0.9615 1.4 1.4 3 1.5 1 0.9246 1.4 0.9 4 1.5 1 0.8890 1.3 0.9 Net Present Value 6.2 5.8

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