Question

in 2019, lamar, a top college quarterback, signed a $40.4 million football contract structured as follows: for the years 2019 through 2024 inclusive, it paid him equal annual upfront payments which totaled $3.9 million. he also received an upfront signing bonus of $500k. the balance of the contract was paid out equally for 30 years (end of year) following the initial series of annual payments. on the other hand melvin, a star running back, signed a deal which paid him $18 million over four years as follows: 50% upfront with the balance of the contract paid out equally at the end of each year for the duration of the contract. around the same time j.j., a bone crushing lineman, received a 4-year, $24 million contract extension which included an upfront signing bonus of $6 million; $1.5 million/year in salary for the duration of the contract and a $300k payment at the beginning of each year for the next 40 years. assume annual interest compounding, a discount rate of 10% and no taxation impact. who got offered the better deal and why?

Answer 1

To determine who got offered the better deal, we need to calculate the present value of each contract. By comparing the present values, we can determine who got offered the better deal.

Step-by-step explanation:

To determine who got offered the better deal, we need to calculate the present value of each contract. Present value is the current worth of future cash flows, discounted back to the present at a given discount rate.

For Lamar's contract, the upfront payments totaling $3.9 million and the upfront signing bonus of $500k can be considered as present value.

The remaining balance of the contract is paid out equally over 30 years. Using the formula for the present value of an annuity, we can calculate the present value of the remaining balance.

For Melvin's contract, 50% of the $18 million is received upfront, and the rest is paid out equally over 4 years. We can calculate the present value of the future payments using the same formula for the present value of an annuity.

For J.J.'s contract, the upfront signing bonus of $6 million and the $300k payment at the beginning of each year for 40 years can be considered as the present value.

The annual salary of $1.5 million for 4 years can also be included. The present value of the remaining balance can be calculated using the formula for the present value of an annuity.

By comparing the present values of each contract, we can determine who got offered the better deal.