A creative general manager has offered two different contracts to a vain quarter

Question

A creative general manager has offered two different contracts to a vain quarterback. The contracts are shown below:

The newspapers report the total dollars of the contract, so contract A will pay a total of $2,508,500.00, while contract B will pay $3,029,050.00. The player will select contract B as it has more publicity. The team can earn 6.00% on their investments, so let's determine the value of each contract.

What is the present value of contract B?

CONTACT A CONTRACT B YEAR SALARY YEAR SALARY 0 $501,700.00 0 $302,600.00 1 $501,700.00 1 $302,600.00 2 $501,700.00 2 $807,950.00 3 $501,700.00 3 $807,950.00 4 $501,700.00 4 $807,950.00

Explanation / Answer

PRESENT VALUE OF CONTRACT A =FUTURE VALUE/(1+0.06)^5

=$ 2508500/(1.06)^5 =$ 2508500/1.3382255776

=$ 1874497.13

PRSENT VALE OF CONTRACT B =FUTURE VALUE /(1+0.06)^5

=$ 3029050/(1.06) ^5=$ 3029050/1.3382255776

=$ 2263482.37

Present value describes how much a future sum of money is worth today.

The formula for present value is:

PV = CF/(1+r)n

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