[Related to Solved Problem 6A.1 on page 208] Before
the 2017 National Football League season, the New York
Giants signed defensive lineman Jason Pierre-Paul to a contract that would pay him an immediate $5 million signing
bonus and the following amounts: $2.5 million for the 2017
season, $17.5 million for the 2018 season, $19.5 million for
the 2019 season, and $17.5 million for the 2020 season.
Assume that Pierre-Paul receives each of his four seasonal
salaries as a lump-sum payment at the end of the year.
a. One newspaper article said that “Pierre-Paul’s deal is
worth $62 million.” Do you agree that $62 million
was the value of this contract? Briefly explain.
b. What was the present value of Pierre-Paul’s contract
at the time he signed it, assuming an interest rate of
10 percent?
c. If you use an interest rate of 5 percent, what was the
present value of Pierre-Paul’s contract?
Sources: Bill Pennington, “Jason Pierre-Paul Agrees to Four-Year
Contract with Giants,” New York Times, March 17, 2017; the terms of
the contract are from sportrac.com.