Asked by HyTech Clutch on May 20, 2024
Verified
We frequently hear a news item that goes something like: "Joe Superstar signed a 5-year deal worth $25 million. Under the contract he will be paid $3 million, $4 million, $5 million, $6 million and $7 million in successive years." In what respect is the statement incorrect? How should the value of the contract be calculated?
Successive Years
Consecutive years; years following one after another in a sequential order.
- Acquire the ability to interpret financial terms of contracts and their implications on the value of deals.
Verified Answer
DS
DeAngela SophiaMay 27, 2024
Final Answer :
By simply adding the nominal amounts of the future payments, the statement ignores the time value of money. Most people will interpret the "value of the contract" in terms of current dollars. Therefore, the quoted value of the contract should be the present value of the future payments.
Learning Objectives
- Acquire the ability to interpret financial terms of contracts and their implications on the value of deals.