A sports team in an effort to solve the salary cap problem has offered a player a contract of $1 million dollars a year for the next season with the payments growing at 7% per year for the next 25 years. The player believes the discount rate for such payments is 13%. What is the value today of taking this contract?
A) $12,405,955.40
B) $16,666,666.67
C) $884,956.09
D) $5,824,965.76

Question

Quizplus · Accepted Answer

The present value of a growing annuity can be calculated using the formula: PV = C * [(1 - (1 + g)^t / (1 + r)^t) / (r - g)], where C is the initial payment, g is the growth rate, r is the discount rate, and t is the number of periods. Plugging in the values: C = $1,000,000, g = 7%, r = 13%, and t = 25, the present value is approximately $12,405,955.40.

A Sports Team in an Effort to Solve the Salary