Question

Suppose that a baseball player eligible for free agent status signs a contract with a new team that promises to pay him $100,000 more than his current team for each of the next three years. Assuming the discount rate is 6 percent, what is the maximum the current costs of moving could be and still have this investment be worthwhile?

Answer 1

Maximum current cost = $267,301.19

Step-by-step explanation:

The maximum current costs of his moving would be worth of the $100,000 annuity in today's dollars, that is the present value.

The present value of the annuity would be determined as follows:

PV = A × (1- (1+r)^(-n) )/ r

Annual cash flow, n- number of years, r-rate of interest

A- 100,000, r- 6%, n- 3

PV - 100,000 × (1- 1.06^(-3))/0.06

PV = $ 267,301.19

Maximum current cost = $267,301.19