Fundamentals of Financial Management (MindTap Course List)
14th Edition
ISBN: 9781285867977
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Question
Chapter 5, Problem 20P
Summary Introduction
To determine: The contract to be recommended.
The net present of a project can be defined as the difference between the present value of the project’s total cost and the present value of the
Therefore, the NPV would be negative when the project's cost is higher as compared to the present value of free cash flows. On the other hand, the NPV of the project would be positive when the cost of the project is lower as compared to the present value of the free cash flows.
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h If she expects to earn 8% annually, which is the best choice?
- If she expects to earn 9% annually, which option would you recommend?
d Explain how interest rates influence the optimal choice.
Problem 6
PV OF A CASH FLOW STREAM. A rookie quarterback is negotiating his first NFL
contract. His opportunity cost is 10%. He has been offered three possible 4-year
contracts. Payments are guaranteed, and they would be made at the end of each year.
Terms of each contract are as follows:
1
2
3.
+-
十
+一
-
Contract 1
$3,000,000
$3,000,000
$3,000,000
$3,000,000
Contract 2
$2,000,000
$3,000,000
$4,000,000
$5,000,000
Contract 3
$7,000,000
$1,000,000
$1,000,000
$1,000,000
As his adviser, which contract would you recommend that he accept?
Problem 7
EFFECTIVE VERSUS NOMINAL INTEREST RATES. Bank A pays 4% inte
Compounded annually on deposits, while Bank B pays 3.5% compounded daily.
A football is evaluating three contract options given to him. Each option offers a bonus and a series of payments over the life of the contract. The rate of return is 7.25% compounded anually to evaluate the options. Which contract should be chosen? Show your calculations.
Year
Cash flow
Ever Football Club
Heal Football Club
Airy Football Club
0
bonus
$3,500,000
$3,500,000
$3,500,000
1
Annual Salary
$700,000
$850,000
$775,000
2
Annual Salary
$750,000
$800,000
$775,000
3
Annual Salary
$800,000
$750,000
$775,000
4
Annual Salary
$850,000
$700,000
$775,000
You are negotiating a sports contract for your client. The client’s opportunity cost (interest rate) is 9%. He has been offered two possible 4 year contracts. Payments are guaranteed and will be made at the end of each year. The terms of each contract are as follows: Which contract will you choose? (Ch. 5)
Year 1
Year 2
Year 3
Year 4
Contract 1
4,500,000
4,500,000
4,500,000
4,500,000
Contract 2
22,000,000
Group of answer choices
Contract 1
Contract 2
Chapter 5 Solutions
Fundamentals of Financial Management (MindTap Course List)
Ch. 5 - Prob. 1QCh. 5 - Explain whether the following statement is true or...Ch. 5 - If a firms earnings per share grew from 1 to 2...Ch. 5 - Prob. 4QCh. 5 - Prob. 5QCh. 5 - The present value of a perpetuity is equal to the...Ch. 5 - Banks and other lenders are required to disclose a...Ch. 5 - What is a loan amortization schedule, and what are...Ch. 5 - Prob. 1PCh. 5 - Prob. 2P
Ch. 5 - FINDING THE REQUIRED INTEREST RATE Your parents...Ch. 5 - TIME FOR A LUMP SUM TO DOUBLE If you deposit money...Ch. 5 - TIME TO REACH A FINANCIAL GOAL You have 42,180.53...Ch. 5 - Prob. 6PCh. 5 - Prob. 7PCh. 5 - LOAN AMORTIZATION AND EAR You want to buy a car....Ch. 5 - PRESENT AND FUTURE VALUES FOR DIFFERENT PERIOOS...Ch. 5 - Prob. 10PCh. 5 - GROWTH RATES Shalit Corporations 2014 sales were...Ch. 5 - EFFECTIVE RATE OF INTEREST Find the interest rates...Ch. 5 - Prob. 13PCh. 5 - FUTURE VALUE OF AN ANNUITY Find the future values...Ch. 5 - Prob. 15PCh. 5 - Prob. 16PCh. 5 - EFFECTIVE INTEREST RATE You borrow 85,000; the...Ch. 5 - Prob. 18PCh. 5 - FUTURE VALUE OF AN ANNUITY Your client is 40 years...Ch. 5 - Prob. 20PCh. 5 - Prob. 21PCh. 5 - Prob. 22PCh. 5 - FUTURE VALUE FOR VARIOUS COMPOUNDING PERIODS Find...Ch. 5 - Prob. 24PCh. 5 - FUTURE VALUE OF AN ANNUITY Kind the future values...Ch. 5 - PV AND LOAN ELIGIBILITY You have saved 4,000 for a...Ch. 5 - EFFECTIVE VERSUS NOMINAL INTEREST RATES Bank A...Ch. 5 - Prob. 28PCh. 5 - Prob. 29PCh. 5 - Prob. 30PCh. 5 - REQUIRED LUMP SUM PAYMENT Starting next year, you...Ch. 5 - Prob. 32PCh. 5 - FV OF UNEVEN CASH FLOW You want to buy a house...Ch. 5 - AMORTIZATION SCHEDULE a. Set up an amortization...Ch. 5 - Prob. 35PCh. 5 - NONANNUAL COMPOUNDING a. You plan to make five...Ch. 5 - Prob. 37PCh. 5 - Prob. 38PCh. 5 - REQUIRED ANNUITY PAYMENTS Your father is 50 years...Ch. 5 - Prob. 40PCh. 5 - Prob. 41SPCh. 5 - Prob. 42IC
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Similar questions
- You are negotiating a sports contract for your client. The client’s opportunity cost (interest rate) is 9.00%. She has been offered two possible 4 year contracts. Payments are guaranteed and will be made at the end of each year. The terms of each contract are shown below. Which contract should you advise your client to choose? Contract # Year 1 Year 2 Year 3 Year 4 Contract 1 5,000,000 5,000,000 5,000,000 5,000,000 Contract 2 0 0 0 22,000,000 Group of answer choices Contract 2 Both contracts have the exact same value Contract 1arrow_forwardYou have been hired as a financial advisor to Michael Jordan. He has received two offers forplaying professional basketball and wants to select the best offer, based on considerations ofmoney only. Offer A is a $10m offer for $2m a year for 5 years. Offer B is a $11m offer of $1ma year for four years and $7m in year 5. What is your advice? (Hint: compare the present value ofeach contract by assuming a range of interest rate, say 8% - 14%)arrow_forwardProblem 3. The Ginebra San Miguel convince Stephen Curry to play for the basketball franchise for three seasons. They offer the player P1 million in year 1, P2.5 million in year 2, and P3 million in year 3. Assuming end of year payments of the proceeds of the contract, how would we find the value of his contract today if the player has a discount rate of 12%, compounding semi-annually?arrow_forward
- .a. A first-round draft choice goalkeeper has been signed to a three-year, $10 million contract. The details provide for an immediate cash bonus of $1million. The player is $2million in salary at the end of the first year, $3 million the next, and 4 million at the end of the last year. Assuming a 10% discount rate, is this package worth $10 million? How much is it worth? .b Suppose a business takes out a GHC5000, 5-year loan at 9%. If the loan agreement calls for the borrower to pay the interest on the loan balance each year and to reduce the loan balance each year by GHC 1000, what would the loan repayment schedule look like? .c. Example: after carefully going over your budget, you have determined you can afford to pay GHC632 per month toward a new sports car. You call up your local bank and find out that the going rate is 1% per month for 48 months. How much can you borrow?arrow_forwardSuppose an investor, Erik, is offered the investment opportunities described in the table below. Each investment costs $1,000 today and provides a payoff, also described below, one year from now. Option Payoff One Year from Now 1 100% chance of receiving $1,100 2 50% chance of receiving $1,000; 50% chance of receiving $1,200 3 50% chance of receiving $200; 50% chance of receiving $2,000 If Erik is risk averse, which investment will he prefer? The investor will choose option 1. The investor will choose option 2. The investor will choose option 3. The investor will be indifferent toward these options. Which kind of stock is most affected by changes in risk aversion? High-beta stocks Low-beta stocks All stocks are affected the same, regardless of beta. Medium-beta stocksarrow_forwardGilles Lebouder has just been offered a job paying $50,000 at the end of his first year. He expects his annual salary will increase by 5% a year until he retires in 40 years. Given an interest rate of 8%, what is the present value of his lifetime salary? Select one. • a. $ 975, 319 b. $1, 126, 571 0 c. $1,371, 643 d. $1,392, 072 0 e. $1, 666, 667 ●arrow_forward
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