PV of cash flow stream A rookie quarterback is negotiating his first NFL contract. His opportunity cost is 6%. 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 adviser, which contract would you recommend that he accept? Select the correct answer. Check1234 Solution Contract 1 $3,500,000 $3,500,000 $3,500,000 $3,500,000 Contract 2 $2,000,000 $3,000,000 $4,000,000 $5,500,000 Contract 3 $7,000,000 $1,000,000 $1,000,000 $1,000,000 Contract 1 gives the quarterback the highest present value; therefore, he should accept Contract 1. Contract 1 $3,500,000 $3,500,000 $3,500,000 $3,500,000 Contract 2 $2,000,000 $3,000,000 $4,000,000 $5,500,000 Contract 3 $7,000,000 $1,000,000 $1,000,000 $1,000,0001234Contract 1$3,500,000$3,500,000$3,500,000$3,500,000Contract 2$200,000$300,000$400,000$5,500,000Contract 3$700,000$100,000$100,000$100,0001234Contract 1$3,500,000$3,500,000$3,500,000$3,500,000PV @ 6%0.94340.89000.83960.7921Total PVPresent Value$3,301,886.79$3,114,987.54$2,938,667.49$2,772,327.82$12,127,869.641234Contract 1$3,500,000$3,500,000$3,500,000$3,500,000FV @ 6%1.06001.12361.19101.2625Total FVFuture Value$3,710,000.00$3,932,600.00$4,168,556.00$4,418,669.36$16,229,825.361234Contract 2$200,000$300,000$400,000$5,500,000PV @ 6%0.94340.89000.83960.7921Total PVPresent Value$188,679.25$266,998.93$335,847.71$4,356,515.15$5,148,041.041234Contract 2$200,000$300,000$400,000$5,500,000FV @ 6%1.06001.12361.19101.2625Total FVFuture Value$212,000.00$337,080.00$476,406.40$6,943,623.28$7,969,109.681234Contract 3$700,000$100,000$100,000$100,000PV @ 6%0.94340.89000.83960.7921Total PVPresent Value$660,377.36$88,999.64$83,961.93$79,209.37$912,548.301234Contract 3$700,000$100,000$100,000$100,000FV @ 6%1.06001.12361.19101.2625Total FVFuture Value$742,000.00$112,360.00$119,101.60$126,247.70$1,099,709.30 Contract 1 gives the quarterback the highest present value; therefore, he should accept Contract 1..

1. PV of cash flow stream
A rookie quarterback is negotiating his first NFL contract. His opportunity cost is 6%. 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 adviser, which contract would you recommend that he accept?
Select the correct answer.
Check1234
Solution
Contract 1 $3,500,000 $3,500,000 $3,500,000 $3,500,000
Contract 2 $2,000,000 $3,000,000 $4,000,000 $5,500,000
Contract 3 $7,000,000 $1,000,000 $1,000,000 $1,000,000
Contract 1 gives the quarterback the highest present value; therefore, he should accept Contract
1.
Contract 1 $3,500,000 $3,500,000 $3,500,000 $3,500,000
Contract 2 $2,000,000 $3,000,000 $4,000,000 $5,500,000
Contract 3 $7,000,000 $1,000,000 $1,000,000 $1,000,0001234Contract
1$3,500,000$3,500,000$3,500,000$3,500,000Contract
2$200,000$300,000$400,000$5,500,000Contract
3$700,000$100,000$100,000$100,0001234Contract
1$3,500,000$3,500,000$3,500,000$3,500,000PV @ 6%0.94340.89000.83960.7921Total
PVPresent
Value$3,301,886.79$3,114,987.54$2,938,667.49$2,772,327.82$12,127,869.641234Contract
1$3,500,000$3,500,000$3,500,000$3,500,000FV @ 6%1.06001.12361.19101.2625Total
FVFuture
Value$3,710,000.00$3,932,600.00$4,168,556.00$4,418,669.36$16,229,825.361234Contract
2$200,000$300,000$400,000$5,500,000PV @ 6%0.94340.89000.83960.7921Total PVPresent
Value$188,679.25$266,998.93$335,847.71$4,356,515.15$5,148,041.041234Contract

2. 2$200,000$300,000$400,000$5,500,000FV @ 6%1.06001.12361.19101.2625Total FVFuture
Value$212,000.00$337,080.00$476,406.40$6,943,623.28$7,969,109.681234Contract
3$700,000$100,000$100,000$100,000PV @ 6%0.94340.89000.83960.7921Total PVPresent
Value$660,377.36$88,999.64$83,961.93$79,209.37$912,548.301234Contract
3$700,000$100,000$100,000$100,000FV @ 6%1.06001.12361.19101.2625Total FVFuture
Value$742,000.00$112,360.00$119,101.60$126,247.70$1,099,709.30
Contract 1 gives the quarterback the highest present value; therefore, he should accept Contract
1.