Before the 2019 National Football League season, the San Francisco 49ers football team signed linebacker Kwon Alexander to a contract that would pay him an immediate $1 million signing bonus and the following amounts: $11.0 million for the 2019 season, $13.1 million for the 2020 season, $14.4 million for the 2021 season, and $14.5 million for the 2022 season. Assume that Alexander receives each of his four seasonal salaries as a lump-sum payment at the end of the year.
a. One news article described Alexander’s contract as “a four-year contract worth $54 million.” How do you think the author arrived at $54 million as the value of the contract? Do you agree that $54 million was the value of this contract? Briefly explain.
b. What was the present value of Alexander’s contract at the time he signed it, assuming an interest rate of 10 percent?
c. If you use an interest rate of 5 percent, what was the present value of Alexander’s contract?