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22 August, 13:22

Suppose two athletes each sign 10-year contracts for $80 million. In one case, we're told that the $80 million will be paid in 10 equal installments. In the other case, we're told that the $80 million will be paid in 10 installments, but the installments will increase by 5 percent per year. Who got the better deal?

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  1. 22 August, 16:47
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    The athlete with equal installments got the better deal.

    Explanation:

    Two athletes each sign 10-year contracts for $80 million.

    In one case, we're told that the $80 million will be paid in 10 equal installments.

    In the other case, the $80 million will be paid in 10 installments, but the installments will increase by 5 percent per year.

    The one with equal installments will get $8 million every year.

    But the one with increasing installments will get smaller payments initially as his payments were to be increased by 5% each year.

    Though the total value of both the annuities will remain the same.
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