Question

Braggart McGee was recently drafted to play professional football for the Springfield Swindlers. The Swindlers offered Braggart a $31,000,000 four-year contract. He would be paid $1,500,000 at the end of the first year, $2,500,000 at the end of the second year, $3,000,000 at the end of the third year, and $24,000,000 at the end of the fourth year. Braggart's agent is trying to persuade him to make a counter-offer of $20,000,000 at the end of the first year and $2,000,000 at the end of years two, three, and four. Braggart does not understand why he would counter a $31,000,000 offer with a $26,000,000 request. The appropriate interest rate is 4%. What is the present value of the Swindlers' offer? What is the present value of the possible counter-offer? Change the interest rate from 4% to 12% and recalculate. What is the present value of the Swindlers' offer? What is the present value of the possible counter-offer? Round to the nearest whole number and no commas.

Answer 1

The cash flows of both the offers are given. The respective calculations are shown in the below images which you can refer to.

Giren, Sol" :- Swindlers offer (1) counter offer (6) 1,500, ooo 20,000,000 2,500,000 2,000,000 Awle - 3,000,000 2000, 000 24,000,000 2,000,000 5*-40%. present value = P2 o (4*) (Hr* Swindlers offer: P₂ (Hr*) 3 (1H ) 4 & present 1,500,000 value - (+004) 2,500,000 + 3,000,000 (1+0.04)” (H0.04) 24,000,000 CH0.04) 4 = 1,442,307.69+ 2,311,390.53 + 2,666,989.08 + 20,515,300.58 = $ 26,935,987.88. ^ $26,935,988.

i Counter offer - present per Value - 20,000,000 + 2,000,000 (H0.04) 1H0.04) 7 2,000,000 (H0.04)3 2,000,000 (+0.04) & = 19, 230,769.23 + 1,849, 112.43 + 1,777, 992.72 + 1,709 608.38 - $ 24,567, 482.76. ~ $24,567,483. kiben r*= 12 % : - " Swindler's offer - present 500,000 + 2,500,000 3,000,000 24,000,000 Value - (+0.12) 1140.12) ² (10.12) (10.12) 4 = 1,339,285.71 + 1,992,984.69 + 2,135,340.74 + 15,252, 433.88. = $ 20,720,045.02. ~ $20,720.045 4 Counter offer: present 20,000,000 2,000,000 + 2,000,000 2,000,000 value - TH0.12) (14012) (H0.12)3 (+0.1214 = 17,857, 142,86 + 1594,387.767 1,423,560 50+ 1,271,036.16 - $ 22, 146, 127.28. ^ $22,146,127.