At the end of 2011, Jose Reyes signed a six-year contract to play shortstop for the Miami Marlins baseball team. The contract was “backloaded” which means that Reyes would be paid much more in the later years of the contract than in the earlier years. For example, the Marlins agreed to pay Reyes a salary of $10 million in 2012 but a salary of $22 million in 2015. In discussing why the Marlins preferred a backloaded contract, baseball writer Michael Jong argued that: Money in the future is obviously less valuable than money in the present.... If inflation goes up three percent a year in the next few seasons, that 2015 value of $22 million would really equate to $20 million ... in today’s money. Assume for simplicity that Reyes receives his $22 million salary in a lump sum at the end of 2015. Assuming an interest rate of 3%, is the author correct that the present value of Reyes’s salary was about $20 million at the beginning of 2012? Is 3% a good interest rate to use in calculating the present value of Reyes’s salary if the inflation rate is expected to be 3%? What would be the present value of his 2015 salary at the beginning of 2012 using an interest rate of 10%?
At the end of 2011, Jose Reyes signed a six-year contract to play shortstop for the Miami Marlins baseball team. The contract was “backloaded” which means that Reyes would be paid much more in the later years of the contract than in the earlier years. For example, the Marlins agreed to pay Reyes a salary of $10 million in 2012 but a salary of $22 million in 2015. In discussing why the Marlins preferred a backloaded contract, baseball writer Michael Jong argued that: Money in the future is obviously less valuable than money in the present.... If inflation goes up three percent a year in the next few seasons, that 2015 value of $22 million would really equate to $20 million ... in today’s money. Assume for simplicity that Reyes receives his $22 million salary in a lump sum at the end of 2015. Assuming an interest rate of 3%, is the author correct that the
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