Before the 2013 season, the Los Angeles Angels signed outfielder Josh Hamilton to a contract that would pay him an immediate $10 million signing bonus and the following amounts: $15 million for the 2013 season, $15 million for the 2014 season, $23 million for the 2015 season, $30 million for the 2016 season, and $30 million for the 2017 season. The contract also specified that $2 million would be given to a charity. Assume that Hamilton receives each of his five seasonal salaries as a lump-sum payment at the end of the season.
a. Some newspaper reports described Hamilton as having signed a $125 million contract with the Angels. Do you agree that $125 million was the value of this contract? Briefly explain.
b. What was the present value of Hamilton's contract at the time he signed it (assuming an interest rate of 10 percent)? For simplicity, you can ignore the $2 million given to charity.
c. If you use an interest rate of 5 percent, what was the present value of Hamilton's contract?
Source: Drew Silva, "Breaking Down Josh Hamilton's Five-Year, $125M Contract," hardballtalk.nbcsports.com, December 15, 2012.