Problem
An NFL defensive lineman has been offered the following contract offers:
Contract A: $1,000,000 signing bonus, $1,000,000 year one salary, $1, 100,000 year two salary, $1,200,000 year three salary
Contract B: $800,000 signing bonus, $900,000 year one salary, $1,000,000 year two salary, $1,100,000 year three salary, $1,200,000 year four salary
1. What are the face values of the contracts?
2. What discount rate would you use to calculate the present value of his contracts? Explain how you decided on the discount rate. Refer to the NFL Contracts Application if you have questions about this step.
3. What is the present value of his contracts? Show your working?
4. What contract should he accept?