Share
Explore BrainMass

Present value of future payments

ON JANUARY 1, 2001, BASEBALL PLAYER ALEX RODRIGUEZ SIGNED A NEW CONTRACT.
THE TOTAL CONTRACT WAS WORTH $252,000,000 AND COVERED 10 YEARS ($242 MILLION IN SALARIES & $10 MILLION IN SIGNING BONUSES.)
THE SALARY WAS TO BE PAID AS FOLLOWS:
2001 - 2004: $21 MILLION PER YEAR
2005 - 2006: $25 MILLION PER YEAR
2007 - 2010: $27 MILLION PER YEAR
THE SIGNING BONUS WAS TO BE PAID AS FOLLOWS:
2001 - 2005: $2 MILLION PER YEAR

ON JANUARY 1, 2002, RODRIGUEZ AGREED TO DEFER $45 MILLION IN ANNUAL SALARY TO 2011 - 2020.
$5 MILLION PER YEAR FROM 2002 - 2010 WAS DEFERRED.

ASSUME THAT ALL FUTURE PAYMENTS ARE TO BE MADE ON DECEMBER 31ST OF EACH YEAR, BEGINNING ON DECEMBER 31, 2001.

ASSUME A 7% INTEREST RATE FOR THE LIFE OF THE CONTRACT.

CALCULATE THE FOLLOWING:

A) THE PRESENT VALUE OF THE ORIGINAL CONTRACT AS OF JANUARY 1, 2001.

B) THE PRESENT VALUE OF THE CONTRACT AS OF JANUARY 1, 2001 BASED ON THE JANUARY 1, 2002 REVISION.

PLEASE SHOW ALL CALCULATIONS

Solution Preview

Please see the attached file.

1. We enter the salary and bonus and find the present value
Since we are finding the present value as in Jan 2001, the Dec 31 payment would be discounted for 1 year and so on
The present value is amount X PV factor
Year Salary Bonus Total PV factor at 7% PV
Jan-01
Dec-01 21 2 23 0.9346 21.50
Dec-02 21 2 23 0.8734 20.09 ...

Solution Summary

The solution explains how to calculate the present value of future payments

$2.19