Question

A Euro league basketball player is to receive a $1,000,000 signing bonus today and $2,000,000 in one year, $3,000,000 in two years, and $4,000,000 three years from now. Assuming interest rate of 10% and ignoring tax considerations, would he be better of earning $8,500,000 today? Why or why not?

I need to know how to answer this using formulas on Excel.

Answer 1

Here you need to compute the present values of the cash flows:

Year	Cash flow
0	1,000,000.00
1	2,000,000.00
2	3,000,000.00
3	4,000,000.00

In excel, use the NPV formula and input the following: rate = 10%, value 1 = 1,000,000; value 2 = 2,000,000 and value 3 = 4,000,000

The excel will give you a figure of $7,302,779.86. Thus total net present value of what you will receive = 1,000,000+7,302,779.86 = $8,302,779.86

Now the amount of $8,500,000 today > $8,302,779.86

Hence the basket ball player will be better off  earning $8,500,000 today considering the time value of money.

Excel image with the use of NPV formula:

Year	Cash flow
1	2,000,000.00
2	3,000,000.00
3	4,000,000.00
NPV of the above cash flow	7,302,779.86
Add: Year 0 cash flow	1,000,000.00
Total NPV	8,302,779.86