An All-Pro defensive lineman is in contract negotiation. The team has offered th

Question

An All-Pro defensive lineman is in contract negotiation. The team has offered the following salary structure: Time Salary 0 $7,000,000 1 3,000,000 2 3,500,000 3 4,200,000 4 5,000,000 The player has asked you, as his agent, to renegotiate the terms. First, he wants a $1,000,000 increase in the value of the overall contract (in present value terms). In other words, if the team’s initial offer is worth $x (in present value terms), he wants the renegotiated offer to be worth $x + $1,000,000. Second, he would like the contract to include a $10,000,000 contract payment today (t=0). Lastly, he wants the remainder of the contract structured so that he receives an equal amount, each and every quarter, for the next 5 years (first payment, one quarter from today). If the appropriate interest rate is 6% per year, compounded monthly, what payment amount should he receive each quarter?

Explanation / Answer

Actual present value = $20,432,045.52

Required present value = $20,432,045.52+$1,000,000 = $21,432,045.52

Required t=0 payment = $10,000,000

Balance amount = $11,432,045.52

Present value of annuity = P×[1-(1÷(1+r)^n)]÷r

r is interest rate per period

P is payment per period

n is number of payments

$11,432,045.52 = P×[1-(1÷(1+(6%÷4))^(5×4))]÷(6%÷4)

Payment on at end of each quarter, P = $665,867.90

Year Cash flows PVF@6% Present value 0 $                         7,000,000 1.000 $              7,000,000.00 1 $                         3,000,000 0.943 $              2,830,188.68 2 $                         3,500,000 0.890 $              3,114,987.54 3 $                         4,200,000 0.840 $              3,526,400.99 4 $                         5,000,000 0.792 $              3,960,468.32 Net present value $            20,432,045.52

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