James Hardy recently rejected a five-year, $20,000,000 contract with the Vancouver Seals hockey team. The contract amount consisted of a signing bonus and equal annual payments as follows: Contract amount Signing bonus Annual payments $ 20,000,000 7,500,000 2,500,000 To sweeten the deal, the president of player personnel for the Seals has now offered a contract amount consisting of a signing bonus and payments which increase annually with a balloon payment at the end of five years as follows: Contract amount Year 1 Year 2 Year 3 Year 4 Year 5 Year 5 balloon payment $ 22,000,000 2,500,000 2,600,000 2,700,000 2,800,000 2,900,000 8,500,000 Required Suppose you are Hardy's agent and you wish to evaluate the first contract using a required rate of return of 15%. Calculate the value of the original contract using factors from the interest tables and separately, using Excel PV function. Factor Total Value of original contract: Time Cash Flow 0 1-5 11 11 X Payments Signing Bonus Value of original contract: Rate Number of periods Payments Future value Type PV Calculate the value of the new contract using the interest tables. Factor Total = Value of new contract: Time Cash Flow 1 2 3 4 5 5 X x = In present value terms, how much better is the second contract