Nic is a great basketball player with a long professional career in front of him.He plays for a European professional team that has made him a very interesting offer.If he will take a "below market" salary beginning one year from today,they will guarantee a 5% annual raise forever - even after he stops playing ball.If the offer is for a $5,000,000 salary to be received one year from today with subsequent payments as described,what is the present value of the contract offer if the cash flows should be discounted at a rate of 12%?
A)$71,428,571
B)$75,000,000
C)$41,666,667
D)$43,750,000

Question

Quizplus · Accepted Answer

The present value of a perpetuity growing at a constant rate can be calculated using the formula: PV = C / (r - g), where C is the cash flow one year from today, r is the discount rate, and g is the growth rate. Here, C = $5,000,000, r = 12% (0.12), and g = 5% (0.05). So, PV = $5,000,000 / (0.12 - 0.05) = $71,428,571.

Nic Is a Great Basketball Player with a Long Professional