Answer to Question #50653 in Finance for naeem
A) A $2000, 000 bonus payment immediately, a payment of 500,000 dollars at the end of each of the next five years, and a deferred payment of 1000,000 at the end of fifth year of the contract.
B) A $500,000 bonus payment immediately, a payment of 300,000 dollars at the end of each of the next five years, and a deferred payment of 200,000 each payable at the end of years 11 through 20.
Ryan has determined that smith's value to the team over the next five years is about 3000,000 dollars (in terms of present value of additional revenue from gate receipts and television discounted at 12% per year) should Ryan accept one of smith's contract demands, if so, which one? Explain fully.
In this case present value will be:
PV = 2,000,000+500,000/1.12+ 500,000/1.12^2+500,000/1.12^3+ 500,000/1.12^4+1,500,000/1.12^5 = $4,369,814.96
B) A $500,000 bonus immediately, $300,000 at the end of each of 5 years, $200,000 at the end of years 11-20.
PV = 500,000+300,000/1.12+ 300,000/1.12^2+300,000/1.12^3+ 300,000/1.12^4+300,000/1.12^5+ 200,000/1.12^11+ 200,000/1.12^12+ 200,000/1.12^13+ 200,000/1.12^14+ 200,000/1.12^15+ 200,000/1.12^16+ 200,000/1.12^17+ 200,000/1.12^18+ 200,000/1.12^19+ 200,000/1.12^20 = $1,945,276.98
Smith's value over the next 5 years is about $3,000,000 (r =12%), so Ryan should accept smith's contract B, as its present value is less than the Smith's value over the next 5 years.
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