Problem 5-20

PV of cash flow stream A rookie quarterback is negotiating his first NFL contract. His opportunity cost is 10%. He has been offered three possible 4-year contracts. Payments are guaranteed, and they would be made at the end of each year. Terms of each contract are listed below:

Contract 1	$3,000,000	$3,000,000	$3,000,000	$3,000,000
Contract 2	$2,500,000	$3,000,000	$4,500,000	$5,500,000
Contract 3	$7,000,000	$1,000,000	$1,000,000	$1,000,000

As his adviser, which contract would you recommend that he accept?

a.

Contract 3 gives the quarterback the highest present value; therefore, he should accept Contract 3.

b.

Contract 3 gives the quarterback the highest future value; therefore, he should accept Contract 3.

c.

Contract 1 gives the quarterback the highest present value; therefore, he should accept Contract 1.

d.

Contract 1 gives the quarterback the highest future value; therefore, he should accept Contract 1.

e.	Contract 2 gives the quarterback the highest present value; therefore, he should accept Contract 2.