A despised football coach is scheduled to make $853,400.00 per year for the next
ID: 2820393 • Letter: A
Question
A despised football coach is scheduled to make $853,400.00 per year for the next 8 years. The first payment is scheduled to be made exactly one year from today. After a 3-9 record last year, the athletic department would like to buy out the remaining 8 years of his contract. The athletic department wants to value the remaining years with a 8.00% discount rate. The coach’s agent would like to use 3.00%.
What is the present value of the athletic department offer?
What is the present value of the agent’s offer?
Explanation / Answer
The given payment of $853,400 is a kind of annuity payment.
The present value of annuity payments can be found out using the formula:
P[1-(1+r)^(-n)]/ r
P is the annual payments
r is the interest rate
n is the number of years.
now,
1.PV of athleticn department offer
=>$853,400 *[1 - (1.08)^(-8)]/0.08
=>$853,400 * 5.74663875
=>$4,904,181.51.
2.PV of agent's offer.
=>$853,400 * [1-(1.03)^(-8)] / 0.03
=>$5,990,606.29.
(as the interest rate is redcued, the present value increases).