Answer:
Results are below.
Step-by-step explanation:
Giving the following information:
New York Yankees:
Signing bonus= $3,000,000
Cf1= $6,000,000
Cf2= $7,000,000
Cf3= $8,000,000
San Francisco Giants:
Signing bonus= $6,000,000
Cf1= $5,500,000
Cf2= $6,000,000
Cf3= $6,000,000
The best option is the one with the higher Present Value.
To calculate the present value, we need to use the following formula on each cash flow:
PV= Cf/(1+i)^n
a) New York Yankees:
Cf0=3,000,000
Cf1= 6,000,000/1.1= 5,454,545.45
Cf2= 7,000,000/1.1^2= 5,785,123.97
Cf3= 8,000,000/1.1^3= 6,010,518.41
Total PV= $20,250,187.83
San Francisco Giants:
Cf0= 6,000,000
Cf1= 5,500,000/1.1= 5,000,000
Cf2= 6,000,000/1.1^2= 4,958,677.69
Cf3= 6,000,000/1.1^3= 4,507,888.81
Total PV= $20,466,566.5
At an interest rate of 10%, the contract of San Francisco Giants is the more profitable.
b) i= 5%
New York Yankees:
Cf0=3,000,000
Cf1= 6,000,000/1.05= 5,714,285.71
Cf2= 7,000,000/1.05^2= 6,349,206.35
Cf3= 8,000,000/1.05^3= 6,910,700.79
Total PV= $21,974,192.85
San Francisco Giants:
Cf0= 6,000,000
Cf1= 5,500,000/1.05= 5,238,095.24
Cf2= 6,000,000/1.05^2= 5,442,176.87
Cf3= 6,000,000/1.05^3= 5,183,025.59
Total PV= $21,863,297.7
At an interest rate of 5%, the contract of New York Yankees is the more profitable.