Billy Wilson, All American
1.Calculate the present value of the three contract proposals offered by the U.S. team. Factor in any probability co
I will assume a 10% rate
Information from the case:
Contract offer 1:
·
·
$900,000 immediate signing bonus.
$850,000 at the end of each year for the next five years.
Contract N° 1=
N=5
Bonus
PV=
Total
$ 4,122,169
Contract offer 2:
·
·
·
·
$200,000 immediate signing bonus.
$100,000 at the end of each year for the next four years. (1)
$150,000 a year at the end of years 5 through 10. (2)
$1,000,000 a year at the end of years 11 through year 40. (3)
Contract N° 2=
Bonus
PV=
Total
$ 4,597,675
Contract offer 3:
·
$1,000,000 immediate signing bonus.
·
$500,000 at the end of year 1.
·
$1,000,000 at the end of year 2.
·
$1,500,000 at the end of year 3.
·
$2,500,000 at the end of year 4.
$200,000 bonus --> Pro Bowl All Star game
There is 25% chance of occurring in each of the next four years
Contract N° 3=
$ 5,273,991
Bonus
PV=
Total
Bonus Pro-Bowl
Expected value per year= $200
PV=
eam. Factor in any probability considerations where appropriate.
$
$
$
900,000
3,222,169
4,122,169
$
$
$
200,000
316,987
516,987
PV=
PV (1)=
Total
$
$
$
653,289 (1)
446,205
446,205
Year 1
Year 2
Year 3
Year 4
$ 1,000,000
$
454,545 $ 826,446 $ 1,126,972 $ 1,707,534
$ 1,454,545 $ 826,446 $ 1,126,972 $ 1,707,534
Bonus Pro-Bowl
Expected value per year= $200,000 x 25% = $50,000
$
158,493
PV=
PV (2)=
Total
$
$
$
9,426,914 (2)
3,634,484
3,634,484