Matt, a star basketball player, is looking to join a new NBA team. The Bulls are offering him $24 million for one year. The Heat is offering him $10 million this year and $7.0 million in each of the next
Two years. The market interest rate is 5 percent. What is the present value of the offer from The
Heat in millions (rounded to the nearest one hundred thousand dollars)?
A) $22.5 million
B) $23.0 million
C) $24.0 million
D) $25.2 million

Question

Quizplus · Accepted Answer

To compare the two offers, we need to calculate the present value of the Heat's offer. Using a financial calculator, the present value of the Heat's offer is:

PV = -$10,000,000 + ($7,000,000 / 1.05) + ($7,000,000 / 1.05^2) 
PV = $20,850,318

Therefore, the present value of the Heat's offer is $20.85 million, which is less than the Bulls' offer of $24 million. Therefore, the best choice is to choose the Bulls' offer. However, if Matt values the flexibility of receiving the money over three years instead of one, he may still choose the Heat's offer.

Matt, a Star Basketball Player, Is Looking to Join a New