A local newspaper carried the following story: Texas Cowboys wide receiver John Young will earn either $11,406,000
Question:
Texas Cowboys wide receiver John Young will earn either $11,406,000 over 12 years or $8,600,000 over 6 years. Young must declare which plan he prefers. The $11 million package is deferred through the year 2017, while the non deferred arrangement ends after the
2011 season. Regardless of which plan is chosen, Young will be playing through the 20ll season. Details of the two plans are given in Table ST3.3.
(a) As it happened, Young ended up with the non-deferred plan. In retrospect, if Young's interest rate was 6%, did he make a wise decision in 2006?
(b) At what interest rate would the two plans be economically equivalent?
Table 3.3
Transcribed Image Text:
Deferred Plan Nondeferred Plan 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total $2,000,000 $2,000,000 900,000 1,000,000 1,225,000 1,500,000 1.975,000 2006 566.0002007 920,0002008 930,000 2009 740.000 2010 740.000 2011 740,000 790,000 540,000 1,040.000 1,140,000 1.260,000 $11,406,000 Total $8,600,000
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