^The^Hazards,^a^professional^baseball^team,^want^to^sign^pitcher^Alex^McScoob^to^a^two-year^contract^but,^because^of^salary^cap^limitations,^can^only^pay^$8^million^for^the^first^year^(Alex's^market^value^is^$10^million^per^year).^The^Hazards^offer^to^pay^$8^millionⁱⁿ^year¹^and^$13^millionⁱⁿ^year^2.Should Alex sign the contract? A)Yes, Alex is better off financially regardless of the interest rate. B)Yes, if the interest rate is less than 50 percent. C)Yes, but only if the team expects to be successful. D)Yes, but only if the interest rate is less than 10 percent.

Question

Quizplus · Accepted Answer

Alex should sign the contract if the interest rate is less than 50 percent because the present value of the total contract ($21 million) is greater than his market value ($20 million) when discounted at any rate below 50 percent.

The Hazards, a professional baseball team, want to sign pitcher

^The^Hazards,^a^professional^baseball^team,^want^to^sign^pitcher