Computation of the present value of the contract

Reference no: EM1313480

According to the February 7, 2002, issue of The Sports Universe, the Seattle Mariner's designated runner; Andy Schneider, signed a three-year contract in January 2002 with the following provisions-

a. $1,400,000 signing bonus.

b. $2,500,000 salary per year for three years.

c. 10 years of deferred payments of $1,250,000 per year (these payments begin in year 4)

d. Several bonus provisions that total as much as $750,000 per year for the three years of the contract.

Assume that Schneider has a 60-percent probability of receiving the bonuses each year, and that he signed the contract on January 1, 2002. Use the expected value of the bonuses as incremental cash flows. Assume the expected cash flows are discounted at 12.36 percent. Ignore taxes. Schneider's signing bonus was paid on January 1, 2002. Schneider\'s salary and bonuses other than the signing bonus are paid at the end of the year. What was the present value of this contract in January when Schneider signed it?

Reference no: EM1313480

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