Signing Bonus $+PVof$ Annuity $+$ Offer $1$

$$918,665$ immediate signing bonus

$$850,000$ at the end of each year for the next $5$ years

Offer $2$

$$209,333$ immediate signing bonus

$$100,000$ at the end of Years $1$ through $4$

$$150,000$ at the end of Years $5$ through $10$

$$1,000,000$ and the end of Years $11$ through $40$

Offer $3$

$$1,003,733$ immediate signing bonus

$$500,000$ at the end of Year $1$

$$1,000,000$ at the end of Year $2$

$$1,500,000$ at the end of Year $3$

$$2,500,000$ at the end of Year $4$

$$168,665$ bonus for any year Luke is selected to play in the Pro Bowl All Star game $(25\%$ probability in each year$)$

Canadian Football League

$$1,118,665$ immediate signing bonus

$$2,000,000$ at the end of Years $1$ through $3$

Only signing bonus is guaranteed $(80\%$ probability of being on team each year$)$

$PVof$ Pro Bowl

$=$ Total Contract Value

$1,003,733+4,114,500+133,667$

$=$$$5,251,900$

Correct Answer:

$$5,251,900$

Now consider the Canadian Football League and solve for NPV of full contract. $($Hint:

don't forget to factor in the probability.$)$

Luke

Correct! The solution is:

$$1,118,665+$$$3,979,200$

$=$$$5,097,865$

Which of the four contracts offers the highest present value?

The $1$st contract from the U$.$S$.$ team

The $2$ nd contract from the U$.$S$.$ team

The $3$rd contract from the U$.$S$.$ team

The contract from the Canadian team

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