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Essay / Research Paper Abstract
This 8 page paper looks at a case supplied by the student. There are offers for four contracts, the student is shown how to calculate the value of the contracts and how to calculate the net present value of the contracts.
Page Count:
8 pages (~225 words per page)
File: TS14_TEbilly.rtf
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Unformatted sample text from the term paper:
contracts Contract 1 Per year Years Signing bonus 900,000 850 each year for 5 years 850,000 5 4250000 Total 5,150,000 Contract 2 Signing
bonus 200,000 Year 1 -4 100,000 4 400,000 Years 5 - 10 150,000 5 750,000 Years 11 - 40 1,000,000 30 30,000,000 Total 31,350,000 Contract
3 Signing bonus 1,000,000 Year 1 500,000 Year 2 1,000,000 Year 3 1,500,000 Year 4 2,500,000 Total 6,500,000 This last calculation need to take into account the bonus that
s offered of 200,000 where there is a 25% likelihood of happening. This will give us an additional 50,000 each year, when taking this as a probability Contract 3
Yearly amount Percentage of bonus (25% probability) Signing bonus 1,000,000 Year 1 500,000 50,000 550,000 Year 2 1,000,000 50,000 1,050,000 Year 3 1,500,000 50,000 1,550,000 Year 4 2,500,000 50,000
2,550,000 Total 5,700,000 However although some of these are more valuable than others they cannot be directly compared as they are over very different period.
Question 2 Canadian contract Amount proportion by probability Signing bonus 1,000,000 Year 1 2,000,000 80% 1,600,000 Year 2 2,000,000 80% 1,600,000 Year 3 2,000,000 80% 1,600,000 Total
5,800,000 Question 3 To assess the real value we can calculate the net present value of each contract, using a 10% discount factor. In each calculation the initial signing
fee is added on without adjustment as this takes place immediately, and does not need discounting. Contract 1 NPV Year Income discount rate discounted
cash flow Accumulative total Year 1 850,000 0.90909091 772,727 772,727 Year 2 850,000 0.82644628 702,479 1,475,207 Year 3 850,000 0.7513148 638,618 2,113,824 Year 4 850,000 0.68301346 580,561 2,694,386 Year 5
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