In 2010, Aroldis Chapman, a baseball player who had defected from Cuba, signed a contract with the Cincinnati Reds. According to baseball writer Keith Law: The Reds heavily backloaded the deal, with Chapman earning just $1 million in 2010 and the full $30 million spread out over the next 10 years. It's not a great structure for the player, because a dollar today is worth more than a dollar next year.
a. Why is a dollar today worth more than a dollar next year?
b. One clause of Chapman's contract called for the Reds to pay him $5 million in 2013. Assuming an interest rate of 10%, what is the present value at the beginning of 2010 of a $5 million payment Chapman would receive at the end of 2013?