Explore BrainMass

Indifferent between the two contracts

5. Steve Hawke is a big football star who has been offered contracts by two different teams. The payments (in millions of dollars) under the two contracts are shown below:

Team A Team B
Year Cash Payment Cash Payment
0 $8.0 $2.5
1 4.0 4.0
2 4.0 4.0
3 4.0 8.0
4 4.0 8.0
Steve plans to accept the contract that provides him with the highest net present value. At what discount rate would he be indifferent between the two contracts?

Solution Summary

The solution explains how to calculate the discount rate at which the star would be indifferent between the two contracts.