Suppose That Ray Allen, a Basketball Player for the Seattle

question 1

Multiple Choice

Suppose that Ray Allen, a basketball player for the Seattle Supersonics, will become a free agent at the end of this NBA season.Suppose that Allen is considering two possible contracts from different teams.Note that the salaries are paid at the end of EACH year. $\begin{array}{lll} & \text { Contract \#1 (Seattle) } & \text { Contract \#2 (Portland) } \\\text { Signing bonus (paid today) } & \$ 1 \text { million } & \$ 1 \text { million } \\\text { First-year salary } & \$ 2 \text { million } & \$ 4 \text { million } \\\text { Second-year salary } & \$ 4 \text { million } & \$ 4 \text { million } \\\text { Third-year salary } & \$ 5 \text { million } & \$ 3 \text { million }\end{array}$ The interest rate is 10%.Based on this information, which of the following is true?

• A)Allen should take the Seattle contract because it has a higher present value
• B)Allen should take the Portland contract because it has a higher present value
• C)Allen is indifferent between the two contracts because they are both worth $12 million
• D)Allen is indifferent between the two contracts because they are both worth $10.9 million

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