Phil Mark Consulting
Harris Jackson
Dear Sir,
RE: Decision regarding the choice of contract between San Francisco 49ers and Dallas Cowboys
I am writing this letter regarding the contract decision for Mr. Harris. Based on the cashflows that Mr. Harris will receive from either of the teams, I used the Net Present Value method to determine which contract will serve Mr. Harris’ financial interests. I chose the San Francisco 49ers contract over the Dallas Cowboys one based on the expected cashflows from either of the teams. I forecasted the cashflows at the given current discount rate of 8% which factors in the opportunity cost and time value of money (Spann 1).
The methodology used was the Net Present Value (NPV) technique which determines today’s value of future earnings. The NPV method was appropriate due to the similar length of both contracts as well as both being in the same industry. The NPV formula is given as;
Net Present Value (NPV) = C0 + C1/ (1+r)
Where,
C0 is the cash flow at time 0 (Signing bonus)
C1 is the cash flow at time 1 (salary at end of year 1)
1/ (1+r) is the discount factor
The cashflows for the next five years was tabulated and summarized as;
As you can see from the table, Mr. Harris will make more money by taking the 49ers contract because of a higher positive net present value. He will receive a lower signing bonus now but the total amount of money he will receive in the future at an 8% discount rate is greater.
Works Cited
Spann Ralf. Making investment decisions with the net present value rule. Akelius UP. 2008. Web. 10 April 2016.
