A baseball player is offered a 5-year contract which pays him the following amounts:
Year 1: $1.2 million
Year 2: $1.6 million
Year 3: $2.0 million
Year 4: $2.4 million
Year 5: $2.8 million
Under the terms of the agreement all payments are made at the end of each year.
Instead of accepting the contract, the player asks his agent to negotiate a contract which has a present value of $1 million MORE than that which has been offered. Moreover, the player wants to receive his payments in the form of a 5-year annuity (payments at the end of the year). All cash flows are discounted at 10%. If the team were to agree to the player’s terms, what would be the player’s annual salary?