[bowler2]

A 5 year contract for $15 million providing $3 million a year for 5 years. A contract 5 year contract for $14 million providing $4 million now and $2 million a year for 5 years. Both 10% interest. Which is better paid.

[CaptainForest]

Option 1
5 year contract for $15 million
providing $3 million a year for 5 years.
interest = 10%

Option 2
5 year contract for $14 million
providing $4 million now
and $2 million a year for 5 years.
interest = 10%


Option 1:
Present Value of an Annuity
I=10%
n=5 years
PMT=3 million
PV = $11,372,360.31

Option 2:
I=10%
n = 5 years
PMT=2 million
PV = $7,581,573.54

Plus the PV of thr $4 million now

So option 2 PV = $11,581,573.54

Summary:
Option 1 = PV = $11,372,360.31
Option 2 = PV = $11,581,573.54

Therefore, Option 2 pays more.