Question

A basketball player is offered the following contract today, Jan. 1, 2012: $2 million immediately, $2.40 million in 2012, $2.90 million in 2013, $3.60 million in 2014, and $3.80 million in 2015. Assume all payments other than the first $2 million are paid at the end of the year. If the appropriate discount rate is 10 percent per year, what is the present value of the deal?

Answer 1

The answer is $11.24 million Explanation:

Using the formula

Present worth = x/(1+R/100)∧n

R = 10%

Year 2012

2.40/(1+10/100)∧1

= 2.40/(1+0.1)∧1

= 2.40/(1.1)∧1

2.40/1.1

= 2.18

Year 2013

2.90/(1+10/100)∧2

= 2.90/(1+0.1)∧2

= 2.90/(1.1)∧2

2.90/1.21

= 2.396

Year 2014

3.60/(1+10/100)∧3

= 3.60/(1+0.1)∧3

= 3.60/(1.1 )∧3

3.60/1.331

= 2.70

Year 2015

To determine the present value

2+3.80/(1+10/100)∧4

= 5.8/(1+0.1)∧4

5.8/(1.1)∧4

5.8/1.4641

= 3.96

Therefore the present value, add together the value from year 1 to year 4

2.18 + 2.396 + 2.70 + 3.96

= 11.236

= 11.24 Approximately

Therefore the present value is $11.24 millions