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?

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Business

Nadeen

1 July, 16:19

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?

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Answers (1)

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Vivian Blevins · Answer 1

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