What is the present value of the contract

Reference no: EM13296148

Rodriguez earns $16 million in the first year, $17 million in years 2 through 4, $19 million in years 5 and 6, $23 million in year 7 and $27 million in years 8 through 10. He would also receive his $10 million signing bonus spread equally over the first 5 years ($2 million per year). His deferred payments will begin in 2011. The deferred payments amounts total $33 million and are $5 million, then $4 million, then 8 amounts of $3 million (ending in 2020). However, the actual payouts will be different.

All of the deferred payments will earn 3% per year until they are paid. For example, the $5 million is deferred from 2001 to 2011, or 10 years, meaning that it will actually be $6.1796 million when paid. Assume that the $4 million payment deferred to 2012 is deferred from 2002 (each payment is deferred 10 years). The contract is a 10-year contract, but each year has a deferred component so that cash flows are paid out over a total of 20 years. The contractual payments, signing bonus, and deferred components are given below. Note that, by contract, the deferred components are not paid in the year they are earned, but instead are paid (plus interest) 10 years later.

What is the Present Value of the Contract?

Reference no: EM13296148

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