PROBLEM 9-1. Present Value Analysis James Hardy recently rejected a $14,000,000, five-year contract with the Vancouver Seals. The contract offer called for an immediate signing bonus of $4,000,000 and annual payments of $2,000,000. To sweeten the deal, the president of player personnel for the Seals has now offered a $16,000,000, five-year contract. This contract calls for annual increases and a balloon payment at the end of five years. Year 1 $2,000,000 Year 2 2,100,000 Year 3 2,200,000 Year 4 2,300,000 Years 2,400,000 Year 5 balloon pymt 5,000,000 Total $16,000,000 Required Suppose you are Hardy's agent and you wish to evaluate the two contracts using a required ate of return of 12 percent. In present value terms, how much better is the secondcontract? We calculate the present value of the two contracts First contract ear Amount 4,000,000 Signing bonus 2,000,000 2,000,000 UAW NEO 2,000,000 2,000,000 2,000,000 V 11,209,552 using the NPV function Second contract Year 1 $2,000,000 Year 2 2,100,000 Year 3 2,200,000 Year 4 2,300,000 Year5 7,400,000 PV $10,686,388 using the NPV function The second contract is not better. It is lower by ($523,164)