Question

A famous quarterback just signed a $10.4 million contract providing $2.6 million a year for 4 years. a less famous receiver signed a $13.0 million 4-year contract providing $3 million now and $2.5 million a year for 4 years. the interest rate is 8%. what is the pv of the quarterback's contract?

Answer 1

The present value of the quarterback's contract is calculated using the present value of an annuity formula, considering the fixed payments over 4 years and discounting them at the given 8% interest rate.

Step-by-step explanation:

To calculate the present value (PV) of the quarterback's contract, we use the formula for the present value of an annuity since the contract payments are equal over a fixed period. The contract is $2.6 million per year for 4 years. The formula for the present value of an annuity is PV = PMT * [(1 - (1 + r)^-n) / r], where PMT is the annual payment, r is the interest rate (expressed as a decimal), and n is the number of periods. Assuming an 8% interest rate, we get the following:

PV = $2.6 million * [(1 - (1 + 0.08)^-4) / 0.08]

This calculation yields the present value of the quarterback's contract, which reflects the current worth of the future payments, discounted at the 8% rate. The calculations, however, would change if the interest rate were different. It is crucial to use the correct interest rate and period count to obtain an accurate present value.