Question

An athlete signs a five-year endorsement deal with a prominent sponsor. Under this deal, the athlete will receive $5,000 each year for the first three years and $6,500 each year for the final two years. What is the present value of the total deal if the payments are discounted 6%

Answer 1

Answer:

PV= $23,370.85

Explanation:

Giving the following information:

Cash flow (1-3)= $5,000

Cash flow (4-5)= $6,500

Discount rate= 6%

To calculate the present value, first, we need to calculate the final value:

FV= {A*[(1+i)^n-1]}/i

A= annual cash flow

Year 1-3:

FV= {5,000*[(1.06^3) - 1] / 0.06

FV= 15,918

Year 4-5:

FV= {6,500*[(1.06^2) - 1]} / 0.06

FV= 13,390

Now, the present value:

PV= FV/(1+i)^n

PV= 15,918/(1.06^3)= 13,365.06

PV= 13,390/(1.06^5)= 10,005.79

PV= $23,370.85