r 5 Ho Oue Today at Noon PV OF CASH FLOW STREAM are guarant

r 5 Ho @Oue Today at Noon ??? PV OF CASH FLOW STREAM are guaranteed, and they would be made at the O end of each year. Terms of each contract are as follows: Contract 2 $2,500,000 $3,000,000 $4,500,000 ss,000,000 Contract 3 $6,000,000 $1,500,000 $1,500,000 s1,500,000 As his adviser, which contract would you recommend that he accept? Select the correct answer O a Contrat I gives the quarterback the highest present vae; therefone, he should accept Contract 1 O c Contract 1 gives the quarterback the highest futune value; thenefore, he should accept Contract 1 Check My Work 6 MacBook Air

Solution

There should be present value (PV) calculation for each contract (C). The contract having the highest PV should be recommended.

PV of C 1

Year

CF, $

5% discount factor (F) = 1/ (1 + 0.05) ^n [where n = years, 1, 2 ..]

CF × F ($)

1

3,500,000

0.952380

3,333,330

2

3,500,000

0.907029

3,174,601.50

3

3,500,000

0.863837

3,023,429.50

4

3,500,000

0.822702

2,879,457

PV

12,410,818

PV of C 2

Year

CF, $

5% discount factor (F) = 1/ (1 + 0.05) ^n [where n = years, 1, 2 ..]

CF × F ($)

1

2,500,000

0.952380

2,380,950

2

3,000,000

0.907029

2,721,087

3

4,500,000

0.863837

3,887,266.50

4

5,000,000

0.822702

4,113,510

PV

13,102,813.50

PV of C 3

Year

CF, $

5% discount factor (F) = 1/ (1 + 0.05) ^n [where n = years, 1, 2 ..]

CF × F ($)

1

6,000,000

0.952380

5,714,280

2

1,500,000

0.907029

1,360,543.50

3

1,500,000

0.863837

1,295,755.50

4

1,500,000

0.822702

1,234,053

PV

9,604,632

The 2^nd contract should be recommended, since it has the highest PV.

Answer: b

Year	CF, $	5% discount factor (F) = 1/ (1 + 0.05) ^n [where n = years, 1, 2 ..]	CF × F ($)
1	3,500,000	0.952380	3,333,330
2	3,500,000	0.907029	3,174,601.50
3	3,500,000	0.863837	3,023,429.50
4	3,500,000	0.822702	2,879,457
PV			12,410,818