PRESENT VALUE PROBLEM

YOU MUST SHOW YOUR CALCULATIONS TO RECEIVE POINTS

Mr. Charlie Speedy Smith just signed an $11.5 million, four year contract with an NFL team (not the Browns!). He received a signing bonus of $2 million; $1,500,000 at the end of year one; $3 million at the end of year two; $3.5 million at the end of year three; and $1.5 million at the end of year four. What is the present value of his contract if money can earn 4% per year?

Contract year Future Contract Amounts

1. $2,00,000
2. $,500,000
3. $3,000,000
4. $,500,000
5. $1,500,000

5. $11,500,000

Question: Explain what present value is and why it is important for you to understand the concept?