Suppose that Stephen Curry, a basketball player for the Golden State Warriors, will become a free agent at the end of this NBA season. Suppose that Curry is considering two possible contracts from different teams. Note that the salaries are paid at the end of EACH year.
The interest rate is 10%. Based on this information, which of the following is true?
A) Curry should take the Boston contract because it has a higher present value.
B) Curry should take the Portland contract because it has a higher present value.
C) Curry is indifferent between the two contracts because they are both worth $12 million.
D) Curry is indifferent between the two contracts because they are both worth $10.9 million.

Question

Suppose that Stephen Curry, a basketball player for the Golden State Warriors, will become a free agent at the end of this NBA season. Suppose that Curry is considering two possible contracts from different teams. Note that the salaries are paid at the end of EACH year. 
The interest rate is 10%. Based on this information, which of the following is true?
A) Curry should take the Boston contract because it has a higher present value. 
B) Curry should take the Portland contract because it has a higher present value. 
C) Curry is indifferent between the two contracts because they are both worth $12 million. 
D) Curry is indifferent between the two contracts because they are both worth $10.9 million.

Quizplus · Accepted Answer

To determine the present value of each contract, we need to calculate the present value of each year's salary and add them up.

For the Boston contract:
- Year 1 salary: $10 million
- Year 2 salary: $11 million
- Year 3 salary: $12 million
PV = 10/(1+0.1)^1 + 11/(1+0.1)^2 + 12/(1+0.1)^3 = $28,065,020

For the Portland contract:
- Year 1 salary: $12 million
- Year 2 salary: $12 million
- Year 3 salary: $12 million
PV = 12/(1+0.1)^1 + 12/(1+0.1)^2 + 12/(1+0.1)^3 = $30,925,043

Therefore, Curry should take the Portland contract because it has a higher present value of $30,925,043 compared to the Boston contract's present value of $28,065,020.

Suppose That Stephen Curry, a Basketball Player for the Golden