Discounted present value, Financial Accounting

Assignment Help:

A player for a Rice team, Jim Jones, is graduating this year and is considering a career in professional sports. The alternative is to work for two years and then attend business school for two more years before taking a job in finance. The professional sports career involves an up-front signing bonus of $500,000 followed by guaranteed salaries over the next ten years of $750,000 per year (in real yearend values starting at the end of the first year). Assume that the professional sports career ends after 10 years, at which time Jim could expect to earn an income of $75,000 per year (in real terms) growing at 1 % per year for the next 30 years. The business career would involve earning $75,000 this year, $78,000 next year, and spending $30,000 per year for the following two years while attending business school (all amounts measured as end of year real values). Upon graduation, however, Jim could expect a starting salary of $140,000 (in year-end values) growing at 7.5% (in real terms) for the next 35 years.

(a) If the appropriate annual effective discount rate is 4.5%, show that the earnings stream associated with the professional sports career has the larger discounted present value.

(b) If Jim desires to maintain a constant level of annual consumption at a discount rate of 4.5%, what would his annual real consumption be?

(c) What financial assets should Jim have at the end of his first year of employment?

(d) How much should Jim have invested the year that he ceases being a professional athlete?


Related Discussions:- Discounted present value

EPS, Do you help with assignments

Do you help with assignments?

Simple balance sheet statement, Current analysis You will need about $1...

Current analysis You will need about $150,000 in start-up costs but you can only borrow half of that amount from your family's home equity (at 13% interest). You will have to b

Calculate income (or loss) for 2012, A lawn care company started business o...

A lawn care company started business on January 1, 2012. The company billed clients $105,000 for lawn care services completed in 2012. By December 31, the company had received $84,

Effect of receiving order, Effect of receiving order The consequences o...

Effect of receiving order The consequences of the making of the receiving order are: The debtor retains ownership, but loses possession and control of his property; Th

Determine the range and quality of information, Determine the Range and qua...

Determine the Range and quality of information Financial accounting reports concentrate on information which can be quantified in monetary terms. Management accounting addition

Potential sources of finance for very new businesses, Potential sources of ...

Potential sources of finance for very new businesses Initial owner finance is almost always the first source of finance for a business, whether from the owner or from family co

Illustration of double entry-branches, Illustration of double entry The ba...

Illustration of double entry The balances on the current accounts of a head office and branch were Ksh 698,000, before the transactions listed below: Normal 0

Proposed dividends by subsidiary company, Proposed dividends by subsidiary ...

Proposed dividends by subsidiary company If the subsidiary company has proposed some dividends appearing under current liabilities then the dividends are payable to the holding c

Define return on capital employed, Q. Define Return on capital employed? ...

Q. Define Return on capital employed? Return on capital employed (ROCE) is as well called accounting rate of return. Distinctly IRR ROCE uses average annual accounting profit b

What is the present value of these future savings?, a) A company has 7000 o...

a) A company has 7000 obsolete toys carried in inventory at a manufacturing cost of $6 per unit. If the toys are reworked for $2 per unit, they could be sold for $3 per unit. If th

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd