In problem 42, we need to find present value for an 8-yearcontract with a deferr
ID: 2662324 • Letter: I
Question
In problem 42, we need to find present value for an 8-yearcontract with a deferred bonus with an 11% interest rate. How do Icalculate this? I'm confused because there are 8 separate salaries.Do they have to be calculated individually? If so, do I still usethe PV formula: =C x[1-present value factor]/r Question: Manny Ramirez signed an 8 year contract worth $160 million.Including a deferred signing bonus, he would receive $16 million in2001, $18.5 million in 2002, $21 million in 2003, $23.5 million in2004, $23 million in 2005, $20 million in 2006, $18 million in2007, and $20 million in 2008. If the appropriate interest rate is11%, what kind of deal did he catch? Assume the first payment ismade immediately, and the next payment occurs in exactly oneyear. In problem 42, we need to find present value for an 8-yearcontract with a deferred bonus with an 11% interest rate. How do Icalculate this? I'm confused because there are 8 separate salaries.Do they have to be calculated individually? If so, do I still usethe PV formula: =C x[1-present value factor]/r Question: Manny Ramirez signed an 8 year contract worth $160 million.Including a deferred signing bonus, he would receive $16 million in2001, $18.5 million in 2002, $21 million in 2003, $23.5 million in2004, $23 million in 2005, $20 million in 2006, $18 million in2007, and $20 million in 2008. If the appropriate interest rate is11%, what kind of deal did he catch? Assume the first payment ismade immediately, and the next payment occurs in exactly oneyear.Explanation / Answer
U need to find PV of each year's salary to arrive at NPV As first payment is imemdiate, CF1 = Y1 Salary. K=11% NPV = CF1+CF2/(1+K)^1 +CF3/(1+K)^2.................+CF8/(1+K)^7 So NPV = 16+18.5/(1+0.11) + 21/(1+0.11)^2 + 23.5/(1+0.11)^3+23/(1+0.11)^4+20/(1+0.11)^5+18/(1+0.11)^6+20/(1+0.11)^7 Solving we get, NPV = 101.96 SO PV of 8 Yr contract of $160M is $101.96M