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$100

$200

$300

On our time line, notice how the first cash flow occurs at the end of the first period, the second at the end of the second period, and the third at the end of the third period.

We will close out this section by answering the question we posed concerning Mike Piazza's MLB contract at the beginning of the chapter. Recall that the contract called for a signing bonus of $7.5 million ($4 million payable in 1999, $3.5 million in 2002) plus a salary of $83.5 million, to be distributed as $6 million in 1999, $11 million in 2000, $12.5 million in 2001, $9.5 million in 2002, $14.5 million in 2003, and $15 million in both 2004 and 2005. If 12 percent is the appropriate discount rate, what kind of deal did Piazza catch?

To answer, we can calculate the present value by discounting each year's salary back to the present as follows (notice that we combine salary and signing bonus in 1999 and 2002):

Year 1: $10.0 million X 1/1.121 Year 2: $11.0 million X 1/1.122 Year 3: $12.5 million X 1/1.123

8,928,571.43 8,769,132.65 8,897,253.10

Year 7:

If you fill in the missing rows and then add (do it for practice), you will see that Piazza's contract had a present value of about $57.5 million, less than 2/3 of the $91 million reported.

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