A first class cricket player has been signed to a three year, $25 million contract provide for an immediate cash bonus of $2 mil. The player is to receive $5 million in salary at the end of the first year, $8 million the next, and $10 million at the end of the last year. Assuming a 15% discount rate, is this package worth $25 million? If not, how much is it worth? Answer - In this case, value of three year contract is $25 million which provide a signing bonus of $2 million Salary at the end of 1st year is $5 million Salary at the end of 2nd year is $8 million Salary at the end of 3rd year is 10 million And the rate of discount=15% Moreover, present value of cash flows $2000,000+$5000,000/1.15+$8000,000/1.15^2+$10000,000/1.1513 Present value of cash flows = $18,972,137.75 Now, the present value of cash flows =$18.97million which means that the package does not worth $25 million. It worth=$18.7 million. A first class cricket player has been signed to a three year, $25 million contract provide for an immediate cash bonus of $2 mil. The player is to receive $5 million in salary at the end of the first year, $8 million the next, and $10 million at the end of the last year. Assuming a 15% discount rate, is this package worth $25 million? If not, how much is it worth? Answer - In this case, value of three year contract is $25 million which provide a signing bonus of $2 million Salary at the end of 1st year is $5 million Salary at the end of 2nd year is $8 million Salary at the end of 3rd year is 10 million And the rate of discount=15% Moreover, present value of cash flows $2000,000+$5000,000/1.15+$8000,000/1.15^2+$10000,000/1.1513 Present value of cash flows = $18,972,137.75 Now, the present value of cash flows =$18.97million which means that the package does not worth $25 million. It worth=$18.7 million