Nic is a great basketball player with a long professional career in front of him

Question

Nic is a great basketball player with a long professional career in front of him. He plays for a European professional team that has made him a very interesting offer. If he will take a "below market" salary beginning one year from today, they will guarantee a 5% annual raise forever - even after he stops playing ball. If the offer is for a $5,000,000 salary to be received one year from today with subsequent payments as described, what is the present value of the contract offer if the cash flows should be discounted at a rate of 12%?

Explanation / Answer

Salary to be received one year from today            5,000,000.00 Growth Rate 5% Discount rate, ke 12% PV of Contract Offer = 5,000,000/(12%-5%) PV of Contract Offer = 5,000,000/(7%) PV of Contract Offer = $71,428,571.43

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