Scenario 15.1:
This year Jacob Verytall signs a "Fifty Million Dollar" contract with the Mission City Muckrakers, a new basketball team. He will be paid $10 million per year over the next 5 years beginning next year. The interest rate is 10%, and the Muckrakers have enough in the bank to generate the payment stream.
-Refer to Scenario 15.1. In terms of this year's dollars, this "Fifty Million Dollar" contract is worth approximately:

Question

Quizplus · Accepted Answer

We need to find the present value of the contract in today's dollars. Since the payments are $10 million per year for 5 years, we can use the present value of an annuity formula. PV = PMT x ((1 - (1 / (1 + r)n)) / r), where PMT = $10 million, r = 10%, and n = 5. Plugging these values into the formula, we get a present value of approximately $37.9 million.

Scenario 15.1: This Year Jacob Verytall Signs a "Fifty Million Dollar" Contract