Question 1090113: Kevin Jones, Texas Tiger’s Quarterback, agreed to an eight-year, $50 million contract that at the time made him the highest paid player in professional football history. The contract included a signing bonus of $11 million and called for annual salaries of $2.5 million in 2003, $1.75 million in 2004, $4.15 million in 2005,$4.90 million in 2006, $5.25 million in 2007, $6.2 million in 2008, $6.75 million in 2009, $7.5 million in 2010. The $11 million signing bonus was prorated over the course of the contract so that an additional $1.375 million was paid each year over the eight-year contract period. With the salary paid at the beginning of each season, what is the worth of his contract at an interest rate of 6%?
Answer by Theo(13342)   (Show Source):
You can put this solution on YOUR website! i used excel to get the present value and the future value of all cash flows.
that worksheet is shown below:
sum(cf) is the sum of all cash flows without any discounting applied to them.
the total is 50 million as it should be.
sum(pv) is the sum of all cash flows discounted at 6% to the beginning of the season in 2003.
sum(fv) is the sum of all cash flows discounted at 6% to the beginning of the season in 2010.
the formula for finding the present value of all cash flows is:
present value of cash flow in year x is equal to the cash flow in year x divided by 1.06 raised to the power of (x minus 2003)
future value of cash flow in year x is equal to the cash flow in year x multiplied by 1.06 raise to the power of (2010 minus x)
the present value of a cash flow in 2003 is that cash flow because it is divided by 1.06 raised to the power of (2003 - 2003) which means it is divided by 1.06 raised to the power of 0 and anything raised to the power of 0 is equal to 1.
the future value of a cash flow in 2010 is that cash flow because it is multiplied by 1.06 raised to the power of (2010 - 1020) which means it is multiplied by 1.06 raised to the power of 0 and anything raised to the power of 0 is equal to 1.
what he received in annual salary and bonuses is equivalent to being given 39.5 million up front.
if he takes that money and invests it at 6% per year, it's worth 59.l5 million at the beginning of the season in 2010.
this assumes, of course, that he hasn't spent any of in the mean time, which is probably not the case since he needs at least some of that money to live on during the 8 years.
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