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problem: According to the February 7, 2002, issue of The Sports Universe, the Seattle Mariner's designated runner; Andy Schneider, signed a 3year 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 four years]         

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

Suppose that Schneider has a 60% probability of receiving the bonuses every year, and that he signed the contract on January 1, 2002. Use the expected value of the bonuses as incremental cash flows. Suppose the expected cash flows are discounted at 12.36%. [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. Determine the present value of this contract in January when Schneider signed it?

Basic Finance, Finance

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