Related to Solved Problem A-11 Before the 2013 season, the Los Angelies Angels s
ID: 1104162 • Letter: R
Question
Related to Solved Problem A-11 Before the 2013 season, the Los Angelies Angels signed outfieider Josh Hamiton to a contract that would pay him the following amounts 2013 2014 2015 2016 2017 $15 $15 $23 $30 $30 The contract also specified a $10 milion signing bonus and that $2 milion would be given to a charity Assume that Hamilton receives each of his five seasonal salaries as a lump-sum payment a the enof e Source: Drew Silva, "Breaking Down Josh Hamilton's five-year, $125M contract," hardbalitalknbesperts.com, December 15, 2012 Some newspaper reports described Hamilton as having signed a $125 milion contract with the Angels Was the value of this contract equal to $125 million cash in hand in 20137 OA. No, because $125 mllon is the sum of payments over the years, nes set of the payments. B. Yes, the tax benefits of the charity paymert allow the S 125 mln to be onsidered preset value. O C. No, because the payments ane made at the end instead of the beginning of each year D. Yes, because$125 milion is the total amount that wil be paid out What was the present value of Hamition's contract at the time he signed it (assuming an inerest rate of 10 peroent)? For simplicity, ignore the $2 milon given to charity lion. (Enter your response rounded to two decimal places) f you use an interest rate of 8 percent, what was the present value of Hamiton's contract?$ million. (Enter your response rounded to two decimal places.)Explanation / Answer
Correct Answer:
A
Explanation:
The payment of $125 million takes place over the course of 5 years. Hence, the present value of the payment at the time of signing of the contract will be less than the $125 million.
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Interest rate = 10%
Present value of the contract = 10 + 15/1.1 + 15/1.1^2 + 23/1.1^3 + 30/1.1^4 + 30/1.1^5
Present value of the contract = $92.43 Million
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If, Interest rate = 8%
Present value of the contract = 10 + 15/1.08 + 15/1.08^2 + 23/1.08^3 + 30/1.08^4 + 30/1.08^5
Present value of the contract = $97.48 Million