Question 3

3a. Suppose two athletes sign 10-year contracts for $80 million. In one case, we're told that the $80 million will be paid in 10 equal installments. In the other case, we're told that the $80 million will be paid in 10 installments, but the installments will increase by 5% per year. Who got the better deal? Why?

3b. You have two options: From option A, you will receive $200 for eight quarters starting from the end of the first quarter. From option B, you will receive $195 for eight quarters starting from the beginning of the first quarter. If the interest rate is 4% compounded quarterly, which one has a higher present value today?

3c. You have two options: From option C, you will receive a perpetuity of $300 every quarter starting from the end of the first year. From option D, you will receive $3,200 for three quarters starting from the end of the first quarter. If the interest rate is 10% compounded quarterly, which one has a higher present value today?