Cedric Benson, a top five draft pick of the Chicago Bears and his agent are evaluating three contract options. In each case there is a signing bonus and a series of payments over the life of the contract. He uses a 10.25 percent rate of return to evaluate the contracts.
Given the cash flows for each option below, which one should he choose?
Year Cash Flow Type Option A Option B Option C
0 Signing Bonus $3,100,000 $4,000,000 $4,250,000
1 Annual Salary $650,000 $825,000 $550,000
2 Annual Salary $715,000 $850,000 $625,000
3 Annual Salary $822,250 $925,000 $800,000
4 Annual Salary $975,000 $1,250,000 $900,000
5 Annual Salary $1,100,000 $1,000,000
6 Annual Salary $1,250,000
Hint: Determine the present value of each option and compare. Create a solution using time value of money equations and then use the NPV financial function to solve: NPV(rate,value1,value2, ...). Make sure that all cells are properly formatted.
Option A Option B Option C
Enter: CF0 = Enter: CF0 = Enter: CF0 =
Enter: CF1 = Enter: CF1 = Enter: CF1 =
Enter: CF2 = Enter: CF2 = Enter: CF2 =
Enter: CF3 = Enter: CF3 = Enter: CF3 =
Enter: CF4 = Enter: CF4 = Enter: CF4 =
Enter: CF5 = Enter: CF5 =
Enter: CF6 =
Enter: I = Enter: I = Enter: I =
Results (equation): PV0 =
Results (NPV function): PV0 = Result: PV0 = Result: PV0 =
Given the analysis above, the best alternative for Mr. Benson is?