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Problem 9-1 Present Value Analysis
James Hardy recently rejected a five-year, $20,000,000 contract with the Vancouver Seals hockey team. The contract amount consisted of a signing bonus and equal annual payments as follows:
		Contract amount		$ 20,000,000
		Signing bonus			7,500,000
		Annual payments		2,500,000
To sweeten the deal, the president of player personnel for the Seals has now offered a contract amount consisting of a signing bonus and payments which increase annually with a balloon payment at the end of five years as follows:
		Contract amount		$ 22,000,000
		Year 1			2,500,000
		Year 2			2,600,000
		Year 3			2,700,000
		Year 4			2,800,000
		Year 5			2,900,000
		Year 5 balloon payment	8,500,000
Required
Suppose you are Hardy's agent and you wish to evaluate the first contract using a required rate of return of 15%. Calculate the value of the original contract using factors from the interest tables and separately, using Excel PV function.
	Value of original contract:
	Time	Cash Flow		Factor		Total
	0				=
	1 - 5				=
	Value of original contract:	Payments	Signing Bonus
		Rate
		Number of periods
		Payments
		Future value
		Type
		PV
Calculate the value of the new contract using the interest tables.
	Value of new contract:
	Time	Cash Flow		Factor		Total
	1				=
	2				=
	3				=
	4				=
	5				=
	5				=
In present value terms, how much better is the second contract?
What-if?
Consider the following after you have completed the requirements of P9-1.
Assume the rate required rate of return drops to 10%. What impact will this have on James Hardy's evaluation of the two contracts?
	Value of original contract:
	Time	Cash Flow		Factor		Total
	0				=
	1 - 5				=
	Value of new contract:
	Time	Cash Flow		Factor		Total
	1				=
	2				=
	3				=
	4				=
	5				=
	5				=
Impact on decision: