Question

A famous quarterback just signed a $15 million dollar contract providing $3 million dollars a year for 5 years. A less famous receiver signed a $14 million dollar 5-year contract providing $4 million now and $2 million a year for 5 years. The interest rate is 10%. Who is better paid

Answer 1

Answer:

the less famous receiver is paid more in current dollars

Explanation:

the present value of the famous quarter back is:

PV = $3,000,000 x 3.7908 (PV annuity factor, 5 periods, 10%) = $11,372,400

the present value of the less famous receiver is:

PV = $4,000,000 + [$2,000,000 x 3.7908 (PV annuity factor, 5 periods, 10%)] = $11,581,600

Explanation:

the difference results form the time value of money, $1 earned today is wroth than $1 earned in the future.