Question

A famous quarterback just signed a $16.5 million contract providing $3.3 million a year for 5 years. A less famous receiver signed a $15.5 million 5-year contract providing $4 million now and $2.3 million a year for 5 years. The interest rate is 10%.a. What is the PV of the quarterback's contract? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)b. What is the PV of the receiver's contract? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

Answer 1

a. $12.51 million

b. $12.72 million

Step-by-step explanation:

The computation of the present value is shown below

a. For quarterback's contract:

= Annual cash flows × PVIFA for 5 years at 10%

= $3.3 million × 3.7908

= $12.51 millions

Refer to the PVIFA table

b. For receivers's contract:

= Annual cash flows × PVIFA for 5 years at 10%

= $4 million + $2.3 million × 3.7908

= $12.72 millions

Refer to the PVIFA table