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Present Value of a Lump Sum

P3-18. Landon Lowman, star quarterback of the university football team, has been approached about forgoing his last two years of eligibility and making himself available for the professional football draft. Talent scouts estimate that Landon could receive a signing bonus of $1 million today along with a 5-year contract for $3 million per year (payable at the end of the year). They further estimate that he could negotiate a contract for $5 million per year for the remaining seven years of his career. The scouts believe, however, that Landon will be a much higher draft pick if he improves by playing out his eligibility. If he stays at the university, he is expected to receive a $2 million signing bonus in two years along with a 5-year contract for $5 million per year. After that, the scouts expect Landon to obtain a 5-year contract for $6 million per year to take him into retirement. Assume that Landon can earn a 10 percent return over this time. Should Landon stay or go?

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