Poor Alex Rodriguez! The newspapers claim that he is making $5.7 million a year. He claims that this is not true in a present value sense and that he will really be making the following amounts for the next 5 years:
Year | Amount
0 (now) | $ 5.5 million (Sign up Bonus)
1 | $ 4 million
2 | $ 4 million
3 | $ 4 million
4 | $ 4 million
5 | $ 7 million
If you wanted to raise the nominal value of his contract to $30 million, while preserving the present value, how would you do it? (You can adjust only the sign up bonus and the final year’s cash flow.)
In this sum we do not have been provided with the prasent value factor. this kind of sum required prasent Value factor.
However I have calculted sum by takin prasent value factor @ 10 %
First of all we will calculate the prasent value for next five year as follow
| Year | prasent
valueFactor |
Amount in
Million |
Prasent Value
of Amount |
| 0 | 1 | 5.5 | 5.5 |
| 1 | 0.90909 | 4 | 3.63636 |
| 2 | 0.82645 | 4 | 3.3058 |
| 3 | 0.75131 | 4 | 3.00524 |
| 4 | 0.68301 | 4 | 2.73204 |
| 5 | 0.62092 | 7 | 4.34644 |
| Total | 22.52588 |
At the rate of 10% prasent Value factor this investment is not worthy because By investing $ 30 Million what he receive is $ 22.53 Million
If Sign up bonus is 10 and final year’s cash flow is 10 then it will be good opporunity. With adjusting figure we will calculate as follow
| Year | prasent
valueFactor |
Amount in
Million |
Prasent Value
of Amount |
| 0 | 1 | 10 | 10 |
| 1 | 0.90909 | 4 | 3.63636 |
| 2 | 0.82645 | 4 | 3.3058 |
| 3 | 0.75131 | 4 | 3.00524 |
| 4 | 0.68301 | 4 | 2.73204 |
| 5 | 0.62092 | 14 | 8.69288 |
| Total | 31.37232 |
