Suppose that a baseball player eligible for free agent status signs a contract with a new team that promises to pay him $100,000 more than his current team for each of the next three years. Assuming the discount rate is 6 percent, what is the maximum the current costs of moving could be and still have this investment be worthwhile?

Question

Jayden Sellers

Business

17 August, 10:58

Suppose that a baseball player eligible for free agent status signs a contract with a new team that promises to pay him $100,000 more than his current team for each of the next three years. Assuming the discount rate is 6 percent, what is the maximum the current costs of moving could be and still have this investment be worthwhile?

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Answers (1)

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Rudy · Answer 1

Maximum current cost = $267,301.19

Explanation:

The maximum current costs of his moving would be worth of the $100,000 annuity in today's dollars, that is the present value.

The present value of the annuity would be determined as follows:

PV = A * (1 - (1+r) ^ (-n)) / r

Annual cash flow, n - number of years, r-rate of interest

A - 100,000, r - 6%, n - 3

PV - 100,000 * (1 - 1.06^ (-3)) / 0.06

PV = $ 267,301.19

Maximum current cost = $267,301.19