Present value involves converting dollars received or paid in the future to their value in today’s dollars. Use your knowledge of present value and the time value of money to analyze the following scenarios.

Scenario A

Barry Bonds, a highly successful baseball player, has recently become a free agent. Assume his agent has negotiated potential contracts with three different ball clubs. The details of these compensation packages are outlined below. For purposes of your analysis, analyze these options as of today, the beginning of the calendar year.

San Francisco Giants

• A $1,000,000 signing bonus payable today.

• $2,000,000 per year for three years. The annual payments are payable at the end of the calendar year, with the first payment occurring at the end of this year.

Chicago Cubs

• A $2,000,000 signing bonus payable at the end of the calendar year.

• $1,000,000 per year for three years. The annual payments are payable at the end of the calendar year, with the first payment occurring at the end of this year.

• A $1,000,000 payment at the end of three years if he completes all three seasons with the Cubs and does not retire prior to the end of his contract. You can assume for this exercise that he intends to meet this condition of his contract.

Milwaukee Brewers

• No signing bonus.

• $1,500,000 per year for three years. The annual payments are payable at the end of the calendar year, with the first payment occurring at the end of this year.

• A local endorsement contract that will pay $1,200,000 at the end of the first calendar year.

Which contract should Barry sign if the only relevant factor in his decision-making process is the total value of the contract and he can earn 8% interest? Explain your answer and provide any necessary supporting calculations.

Scenario B

Kristen Nash recently won the jackpot in the New Jersey lottery while she was visiting her parents.

When she arrived at the lottery office to collect her winnings, she was offered the following two payout options:

• Receive $5,000,000 in cash today.

• Receive $2,000,000 today and $600,000 per year for 10 years, with the first $600,000 payment being received one year from today.

• Receive $1,000,000 per year for 10 years, with the first payment being received one year from today.

Assuming that the market rate of interest is 9%, which payout option should Kristen select? Explain your answer and provide any necessary supporting calculations.