Cedric Benson, a top five draft pick of the Chicago Bears and his agent are eval

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 quations 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 quations and then use the NPV financial function to solve: NPV(rate,value1,value2, ...). Make sure that all cells are properly formatted.

Explanation / Answer

The financial entries are as follows.

Based on above analysis, the best alternative is option C since it gives highest NPV.

Year Cash Flow OPTION A OPTION B OPTION C 0 CF0 31,00,000 40,00,000 42,50,000 1 CF1 6,50,000 8,25,000 5,50,000 2 CF2 7,15,000 8,50,000 6,25,000 3 CF3 8,22,250 9,25,000 8,00,000 4 CF4 9,75,000 12,50,000 9,00,000 5 CF5 11,00,000 10,00,000 6 CF6 12,50,000 I 10.25 10.25 10.25 PV0 69,22,646.77 69,83,894.87 70,83,096.26

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