Question
Clayton Kershaw, a dominating left-handed pitcher, is seeking to renew his contract with the L.A. Dodgers. The general manager (GM) of the Dodgers has offered
Clayton Kershaw, a dominating left-handed pitcher, is seeking to renew his contract with the L.A. Dodgers. The general manager (GM) of the Dodgers has offered Clayton two possible 5-year contracts:Contract I: Clayton will receive a payment at the end of every month for five years (i.e.a total of 60 payments). The first payment will be for $675,000 (at the end of the firstmonth), and all the subsequent payments will increase by 1% every month. In addition ,Clayton will receive a signing bonus of $2 million payable now. Contract II: Clayton will receive five equal payments of $10 million in the middle of each of the upcoming five years (i.e. the first payment will be received in 6 months, the second in 18 months, etc.).
Suppose that Clayton can invest this money at an annual APR of 10%.
Find the present value of contract I.
Find the present value of contract II
Which contract should the player take?
Please show and explain the steps/formulas used to solve the two present values.
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