Dallas Cowboys wide receiver John Young will earn either $11,406,000 over 12 yea
ID: 2736212 • Letter: D
Question
Dallas Cowboys wide receiver John Young will earn either $11,406,000 over 12 years or $8,600,000 over 6 years. Young must declare which plan he prefers. The $11 million dollar package is deferred through the year 2017, while the non-deferred arrangement ends after the 2011 season. Regardless of which plan is chosen, Young will be playing through the 2011 season. The details of the two plans are given below. Write the assumptions on the planning horizon.
Year Deferred NonDeferred
2006 $2,000,000.00 $2,000,000.00
2007 $566,000.00 $900,000.00
2008 $920,000.00 $1,000,000.00
2009 $930,000.00 $1,225,000.00
2010 $740,000.00 $1,500,000.00
2011 $740,000.00 $1,975,000.00
2012 $740,000.00
2013 $790,000.00
2014 $540,000.00
2015 $1,040,000.00
2016 $1,140,000.00
2017 $1,260,000.00
$11,406,000.00 $8,600,000.00
Young’s TVOM is 6%. Based on PW, FW and AW find the best plan for John Young. (Year 2006 is EOY=0)
Explanation / Answer
Deferred Plan
Year
Deferred
P/V Factor
F/V factor
A/F factor
PW = Amount x P/V Factor
FW = Amount x F/V factor
AW = Amount x A/F factor
2006
$2,000,000.00
0.943
2.0122
1
$1,886,000.00
$4,024,400.00
$2,000,000.00
2007
$566,000.00
0.89
1.8983
0.4854
$503,740.00
$1,074,437.80
$274,736.40
2008
$920,000.00
0.84
1.7908
0.3141
$772,800.00
$1,647,536.00
$288,972.00
2009
$930,000.00
0.792
1.6895
0.2286
$736,560.00
$1,571,235.00
$212,598.00
2010
$740,000.00
0.747
1.5938
0.1774
$552,780.00
$1,179,412.00
$131,276.00
2011
$740,000.00
0.705
1.5036
0.1434
$521,700.00
$1,112,664.00
$106,116.00
2012
$740,000.00
0.665
1.4185
0.1191
$492,100.00
$1,049,690.00
$88,134.00
2013
$790,000.00
0.627
1.3382
0.101
$495,330.00
$1,057,178.00
$79,790.00
2014
$540,000.00
0.592
1.2625
0.087
$319,680.00
$681,750.00
$46,980.00
2015
$1,040,000.00
0.558
1.191
0.0759
$580,320.00
$1,238,640.00
$78,936.00
2016
$1,140,000.00
0.527
1.1236
0.0668
$600,780.00
$1,280,904.00
$76,152.00
2017
$1,260,000.00
0.497
1.06
0.0593
$626,220.00
$1,335,600.00
$74,718.00
$11,406,000.00
$8,088,010.00
$17,253,446.80
$3,458,408.40
Non-deferred Plan
Year
Non deferred
P/V Factor
F/V factor
A/F factor
PW = Amount x P/V Factor
FW = Amount x F/V factor
AW = Amount x A/F factor
2006
$2,000,000.00
0.943
1.4185
1
$1,886,000.00
$2,837,000.00
$2,000,000.00
2007
$900,000.00
0.89
1.3382
0.4854
$801,000.00
$1,204,380.00
$436,860.00
2008
$1,000,000.00
0.84
1.2625
0.3141
$840,000.00
$1,262,500.00
$314,100.00
2009
$1,225,000.00
0.792
1.191
0.2286
$970,200.00
$1,458,975.00
$280,035.00
2010
$1,500,000.00
0.747
1.1236
0.1774
$1,120,500.00
$1,685,400.00
$266,100.00
2011
$1,975,000.00
0.705
1.06
0.1434
$1,392,375.00
$2,093,500.00
$283,215.00
$8,600,000.00
$7,010,075.00
$10,541,755.00
$3,580,310.00
Based on above calculation, the 12 year plan should be accepted when using PW and FW method, which the non-deferred plan should be accepted when using AW method.
Deferred Plan
Year
Deferred
P/V Factor
F/V factor
A/F factor
PW = Amount x P/V Factor
FW = Amount x F/V factor
AW = Amount x A/F factor
2006
$2,000,000.00
0.943
2.0122
1
$1,886,000.00
$4,024,400.00
$2,000,000.00
2007
$566,000.00
0.89
1.8983
0.4854
$503,740.00
$1,074,437.80
$274,736.40
2008
$920,000.00
0.84
1.7908
0.3141
$772,800.00
$1,647,536.00
$288,972.00
2009
$930,000.00
0.792
1.6895
0.2286
$736,560.00
$1,571,235.00
$212,598.00
2010
$740,000.00
0.747
1.5938
0.1774
$552,780.00
$1,179,412.00
$131,276.00
2011
$740,000.00
0.705
1.5036
0.1434
$521,700.00
$1,112,664.00
$106,116.00
2012
$740,000.00
0.665
1.4185
0.1191
$492,100.00
$1,049,690.00
$88,134.00
2013
$790,000.00
0.627
1.3382
0.101
$495,330.00
$1,057,178.00
$79,790.00
2014
$540,000.00
0.592
1.2625
0.087
$319,680.00
$681,750.00
$46,980.00
2015
$1,040,000.00
0.558
1.191
0.0759
$580,320.00
$1,238,640.00
$78,936.00
2016
$1,140,000.00
0.527
1.1236
0.0668
$600,780.00
$1,280,904.00
$76,152.00
2017
$1,260,000.00
0.497
1.06
0.0593
$626,220.00
$1,335,600.00
$74,718.00
$11,406,000.00
$8,088,010.00
$17,253,446.80
$3,458,408.40
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