Magnus Carlsen has a contract where he is paid to teach bright kids to play chess for $80,000 per year for 20 years (first payment is in year 1). He is offered an alternative deal to compete in the world championship where the grand prize is $200,000 paid immediately upon winning. Championship is 4 years from now and Magnus is sure that if he keeps up the practice, he will win with probability 100%. Practice requires him to forgo the current contract to teach chess. If Magnus decides to pass on the current teaching contract, he cannot get it back regardless whether he wins or loses in the championship. However, if he wins the championship, he will be able to get a new contract that will pay him $100,000 in the first year after the world tournament (year 5 from today) and his compensation will grow at 1% per year for the remaining years (the last payment is in year 20). The cost of capital is 9% per year. a. What is the present value today (as of year O) of his current teaching contract? [ Select ] Round to nearest dollar. b. What is the present value today (as of year 0) of $200,000 grand prize in year 4? [ Select ] A Round to nearest dollar. c. What is the present value today (as of year 0) of his new teaching contract? [ Select ] Round to nearest dollar. d. Should Magnus prepare for the world championship? [Select] Magnus Carlsen has a contract where he is paid to teach bright kids to play chess for $80,000 per year for 20 years (first payment is in year 1). He is offered an alternative deal to compete in the world championship where the grand prize is $200,000 paid immediately upon winning. Championship is 4 years from now and Magnus is sure that if he keeps up the practice, he will win with probability 100%. Practice requires him to forgo the current contract to teach chess. If Magnus decides to pass on the current teaching contract, he cannot get it back regardless whether he wins or loses in the championship. However, if he wins the championship, he will be able to get a new contract that will pay him $100,000 in the first year after the world tournament (year 5 from today) and his compensation will grow at 1% per year for the remaining years (the last payment is in year 20). The cost of capital is 9% per year. a. What is the present value today (as of year O) of his current teaching contract? [ Select ] Round to nearest dollar. b. What is the present value today (as of year 0) of $200,000 grand prize in year 4? [ Select ] A Round to nearest dollar. c. What is the present value today (as of year 0) of his new teaching contract? [ Select ] Round to nearest dollar. d. Should Magnus prepare for the world championship? [Select]
