Michael received a professional baseball contract paying $7,000,000 per year for 5 years,Bert received a two-year contract for $16,000,000 per year.For purposes of calculations,treat these contracts as ordinary annuities.Who's contract has a greater present value if we assume a discount rate of 6%?
A)Bert = $29,334,283
B)Michael = $29,486,547
C)Bert = $39,459651
D)Michael = $39,743,196

Question

Quizplus · Accepted Answer

The present value of an annuity can be calculated using the formula PV = P * [(1 - (1 + r)^-n) / r], where P is the payment per period, r is the discount rate per period, and n is the number of periods. For Michael, P = $7,000,000, r = 6% or 0.06, and n = 5. For Bert, P = $16,000,000, r = 0.06, and n = 2. Calculating the present values for both and comparing them shows that Michael's contract has a greater present value.

Michael Received a Professional Baseball Contract Paying $7,000,000 Per Year