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Find the present value of contract i

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Clayton Kershaw, a dominating left-handed pitcher, is seeking to renew his contract with the L.A. Dodgers. The general manager (GM) of the Dodgers has offered Clayton two possible 5-year contracts:

  • Contract I: Clayton will receive a payment at the end of every month for five years (i.e. a total of 60 payments). The first payment will be for $675,000 (at the end of the first month), and all the subsequent payments will increase by 1% every month. In addition, Clayton will receive a signing bonus of $2 million payable now.
  • Contract II: Clayton will receive five equal payments of $10 million in the middle of each of the upcoming five years (i.e. the first payment will be received in 6 months, the second in 18 months, etc.). Suppose that Clayton can invest this money at an annual APR of 10%.

a. Find the present value of contract I.

b. Find the present value of contract II.

Reference no: EM132485064

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