Reference no: EM133041921

Question - Assume that two athletes sign 8-year contracts that pay out a total of $60 million over the life of the contracts. One contract will pay the $60 million in equal installments over the 8 years. The other contract will pay the $60 million in installments, but the installments increase 5% per year. This is easy for the $60 million over 8 years in equal installments ($60M/8 years = $7.5M/year). It takes some work to set up the alternative payment scheme so that all eight payments also equal $60M. If you just take $7.5M per year and add 5% per year, the nominal total is more than $60M and you are comparing apples and oranges and this exercise will not show anything about the time value of money. Which athlete received the better deal? You must show your work and explain your position in detail.

A professional sport athlete, just signed a nonguaranteed (meaning that she receives no salary if she is injured) contract that pays her $4 million per year for the next five years. The athlete is severely injured in a training accident and will no longer be able to play her sport and is released from the team. The athlete sues the company that made the training equipment that caused her injury. The jury determines that the equipment company is liable for her injury and awards her $20 million to cover the loss of earnings over the next five seasons. Given what we have learned in this chapter, was the jury's damage award correct? You must show your work and explain your position in detail.