A star basketball player signs a contract that newspaper reports indicate is worth $10 million. The player receives $2 million upon signing, and $2 million every year for four years. The contract is worth
A) less than $10 million since the present value of $2 million received one or more years from now is less than $2 million.
B) more than $10 million since the present value of $2 million received one or more years from now is more than $2 million.
C) $10 million as reported in the press.
D) some amount around $10 million. To determine whether it is more or less than $10 million we need to know whether the interest the player can earn is more or less than the market rate of interest.
Ans: A) less than $10 million since the present value of $2 million received one or more years from now is less than $2 million.
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