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Indifferent between the two contracts

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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?

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Solution Summary

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