Question

A rookie quarterback is negotiating his first NFL contract. His opportunity cost is 10 percent.

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asked 2020-11-29
A rookie quarterback is negotiating his first NFL contract. His opportunity cost is 10 percent. He has been offered three possible 4-year contracts. Payments are guaranteed, and they would be made at the end of each year. Terms of each contract are listed below: As his advisor, which would you recommend that he accept?

\begin{array}{|l|l|}\hline&1&2&3&4\\\hline\text{Contract 1}&$3,000,000&$3,000,000&$3,000,000&$3,000,000\\\hline\text{Contarct 2}&$2,000,000&$3,000,000&$4,000,000&$5,000,000\\\hline\text{Contarct 3}&$7,000,000&$1,000,000&$1,000,000&$1,000,000\\\hline\end{array}

Answers (1)

2020-11-30

To solve this problem, you present value each of the futurecashflows to today.

The payment made after 1 year is worth

\(\frac{X}{(1+10\%)^1} \)today.

The payment made after 2 year is worth \(\frac{X}{(1+10\%)^2}\) today. etc.

So, the value of contract 1 is:
\(=\frac{$3MM}{(1.1)}+\frac{$3MM}{(1.1)^2}+\frac{$3MM}{(1.1)^3}+\frac{$3MM}{(1.1)^4}=$9,509,596.34 \) Contract 2 = $10,717,847.14 

Contract 3 = $8,624,410.90.

So Contract 2 is the most valuable.

 

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