Question

g This year Jacob Verytall signs a "Fifty Million Dollar" contract with the Mission City Muckrakers, a new basketball team. Hewill be paid $10 million per year over the next 5 years beginning next year. The interest rate is 10%, and the Muckrakers Have enough in the bank to generate the payment stream.6)Refer to Scenario 15.1. If the interest rate falls,6)A)the present value of this contract will fall.B)Jacob will be paid more than $10 million each year as he can invest the money.C)Jacob will be paid less than $10 million each year.D)the present value of this contract will rise.E)the present value of this contract will be unaffected.

Answer 1

D)the present value of this contract will rise.

Step-by-step explanation:

The $10 million dollar per year cashflow for 5 years is an annuity. Using a financial calculator, the present value of this annuity would be as follows;

PMT = 10,000,000

N = 5

I/Y = 10%

FV = 0

then compute the present value ; CPT PV = $37,907,867.69

In the other scenario, if interest rate falls to like 6%, the PV would be as follows;

PMT = 10,000,000

N = 5

I/Y = 6%

FV = 0

CPT PV = $42,123,637.86

Therefore, as can be seen, the present value of the contract would rise.