Question

A local newspaper headline​ blared, "Bo Smith Signed for​ $30 Million." A reading of the article revealed that on April​ 1, 2014, Bo​ Smith, the former​ record-breaking running back from Football​ University, signed a​ $30 million package with the Dallas Rangers. The terms of the contract were​ $3 million​ immediately, $2.4 million per year for the first five years​ (with the first payment after one​ year) and​ $3 million per year for the next five years​ (with the first payment at year​ 6). If​ Bo's interest rate is​ 8% per​ year, what would his contract be worth at the time he signs​ it?

Answer 1

Answer:

PV= 20.734,618.17

Explanation:

Giving the following information:

Bo​ Smith signed a​ $30 million package with the Dallas Rangers. The terms of the contract were​ $3 million​ immediately, $2.4 million per year for the first five years​ (with the first payment after one​ year) and​ $3 million per year for the next five years​ (with the first payment at year​ 6). Bo's interest rate is​ 8%.

We need to use the following formula:

NPV= [Cf/(1+i)^n]

Cf= cash flow

NPV= 3000000 + 2,400,000/1.08 + 2,400,000/1.08^2 + .... + 3,000,000/1.08^10

NPV= 20.734,618.17