1) Calculating Present Values. In the 1994 NBA draft, no one was surprised when the Milwaukee Bucks took "Big Dog" Robinson with the first pick. But Robinson wanted big bucks: a 13-year deal worth a total of $100 million. He had to settle for about $68 million over 10 years. His contract called for $2.9 million the first year, with annual raises of $870,000. So how big a bite did "Big Dog" really take? Assume a 12% discount rate. The answer is $34,006,704.09
2) EAR versus APR. You have just purchased a new warehouse. To finance the purchase, you've arranged for a 30 year mortgage loan for 80 percent of the $1,450,000. purchase price. The monthly payment on this loan will be $9,800. What is the APR on this loan? The EAR? The answer is APR=9.55% EAR=9.98%
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Present Value calculations and EAR versus APR is examined.