Cedric Benson, a top five draft pick of the Chicago Bears and his agent are eval
ID: 2771244 • Letter: C
Question
Cedric Benson, a top five draft pick of the Chicago Bears and his agent are evaluating three contract options. In each case there is a signing bonus and a series of payments over the life of the contract. He uses a 10.25 percent rate of return to evaluate the contracts.
Given the cash flows for each option below, which one should he choose?
Year Cash Flow Type Option A Option B Option C
0 Signing Bonus $3,100,000 $4,000,000 $4,250,000
1 Annual Salary $650,000 $825,000 $550,000
2 Annual Salary $715,000 $850,000 $625,000
3 Annual Salary $822,250 $925,000 $800,000
4 Annual Salary $975,000 $1,250,000 $900,000
5 Annual Salary $1,100,000 $1,000,000
6 Annual Salary $1,250,000
Hint: Determine the present value of each option and compare. Create a solution using time value of money equations and then use the NPV financial function to solve: NPV(rate,value1,value2, ...). Make sure that all cells are properly formatted.
Option A Option B Option C
Enter: CF0 = Enter: CF0 = Enter: CF0 =
Enter: CF1 = Enter: CF1 = Enter: CF1 =
Enter: CF2 = Enter: CF2 = Enter: CF2 =
Enter: CF3 = Enter: CF3 = Enter: CF3 =
Enter: CF4 = Enter: CF4 = Enter: CF4 =
Enter: CF5 = Enter: CF5 =
Enter: CF6 =
Enter: I = Enter: I = Enter: I =
Results (equation): PV0 =
Results (NPV function): PV0 = Result: PV0 = Result: PV0 =
Given the analysis above, the best alternative for Mr. Benson is????
Hint: Determine the present value of each option and compare. Create a solution using time value of money equations and then use the NPV financial function to solve: NPV(rate,value1,value2, ...). Make sure that all cells are properly formatted.
Explanation / Answer
Statement showing calculation of NPV Option A Option B Option C Particulars Time PVF@10.25% Amount PV(Amount *PVF) Amount PV(Amount *PVF) Amount PV(Amount *PVF) Cash inflows - 1.000 3,100,000.00 3,100,000.00 4,000,000.00 4,000,000.00 4,250,000.00 4,250,000.00 Cash inflows 1.000 0.9070 650,000.00 589,569.16 825,000.00 748,299.32 550,000.00 498,866.21 Cash inflows 2.000 0.8227 715,000.00 588,232.27 850,000.00 699,297.10 625,000.00 514,189.05 Cash inflows 3.000 0.7462 822,250.00 613,575.61 925,000.00 690,249.24 800,000.00 596,972.32 Cash inflows 4.000 0.6768 975,000.00 659,918.38 1,250,000.00 846,049.20 900,000.00 609,155.43 Cash inflows 5.000 0.6139 1,100,000.00 675,304.58 - 1,000,000.00 613,913.25 Cash inflows 6.000 0.5568 1,250,000.00 696,046.77 - - PV of Cash inflows 6,922,646.77 6,983,894.87 7,083,096.26 Best option is option C
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