Question
A rookie quarterback is in the process of negotiating his first contract. The team's general manager has offered him three possible contracts. Each contract lasts
| A rookie quarterback is in the process of negotiating his first contract. The team's general | |||||||
| manager has offered him three possible contracts. Each contract lasts for four years. |
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| All of the money is guaranteed and is paid at the end of each year. The payment |
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| terms of the contracts are as follows: |
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| (dollars in millions) |
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| Year | Contract 1 |
| Contract 2 |
| Contract 3 |
| |
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| 1 | $1.50 | 1.0 | 3.5 |
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| 2 | $1.50 | 1.5 | 0.5 |
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| 3 | $1.50 | 2 | 0.5 |
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| 4 | $1.50 | 2.5 | 0.5 |
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| The quarterback discounts all the cash flows at 12%. Which of the three |
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| contracts offers the most value? (Hint: Calculate the present value of future cash flows) |
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