Problem 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
Problem 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%