PROBLEM 9-1. Present Value Analysis

James Hardy recently rejected a $20,000,000, five-year contract with the Vancouver Seals hockey team. The contract offer called for an immediate signing bonus of $7,500,000 and annual payments of $2,500,000. To sweeten the deal, the president of player personnel for the Seals has now offered a $22,000,000, five-year contract. This contract calls for annual increases and a balloon payment at the end of 5 years.

Year 1 $250,000

Year 2 $440,000

Year 3 $650,000

Year 4 $850,000

Year 5 $1,102,765

Required

Suppose you are Hardy's agent and you wish to evaluate the two contracts using a required rate of return of 15 percent. In present value terms, how much better is the second contract?